Protecting Your Business During a Contested Divorce

Amazon founder, Jeff Bezos, had to pay his ex-wife $35 billion when they divorced. Although this is the most expensive divorce in history, it is one of the endless examples of business owners who have to give profits to their ex-spouses when they split.

Louisiana is a community property state, which means the court splits shared assets between you and your spouse during a divorce. It’s not as simple when you and/or your spouse have a business, and one party contesting the divorce further complicates things.

 If you don’t have a prenuptial agreement with your spouse, or you haven’t specified ownership in the event of a divorce in a shareholder’s agreement, you risk losing your business or having to pay a large amount to hold on to it. Fortunately, an experienced divorce attorney can help protect your business during a contested divorce.

Community vs. Separate Property in Louisiana Divorces

Louisiana is one of several community property states in the United States. Under the state’s law, any property you or your spouse acquired during your marriage qualifies as community property, which you must split equally in the event of the divorce. It follows that if you started your business during your marriage, your spouse automatically gets half. However, dividing business interests is not as simple as dividing other property.

Specific factors your lawyer and the court will examine to determine if your spouse has a vested interest in the business include:

  • Whether you were married when you started the business
  • Who provided startup funding for your business
  • The physical and financial contributions you and your spouse made to the business during your marriage

Choosing the Right Path for Your Business During a Divorce

You and your spouse can take three paths with your business during a divorce. The path you choose hinges on the type of business you own and how contentious your divorce is.

  • Co-ownership. Even in a contested divorce, some spouses manage to keep the bitterness to a minimum. If you and your soon-to-be-ex get along fairly well, it might be possible that you can continue to own and operate the businesses after you dissolve your marriage. However, this is not common because many who do not make good marriage partners also struggle to make good business partners. 
  • Sell the business. Selling your business to a third party could be an option if you do not wish to keep your business. If you sell, you will have to split the proceeds of the sale with your spouse. The percentage split will depend on whether the court deems the business as community or separate property. If there are multiple owners or investors, this may not be the right choice for your situation.
  • Buy out your spouse. Those who want to keep their business during a divorce, often choose to buy out their spouse’s interest in their business. This could include paying a lump sum or cash payments for a specified amount of time. If cash is not an option, you still might be able to buy out your spouse by negotiating with other assets. For example, you could offer your half of your house, vehicles, and other high-ticket assets to cover your spouse’s half of the business.

Business Valuation During a Divorce

If you are amidst a contested divorce, you can be sure your spouse will want the value of the business to be as high as possible. Regardless of whether you sell or buy out your spouse’s interest, you need a proper business valuation to ensure you are working with current and fair numbers.  You can find a wide range of consultants or companies to perform a business valuation. They will use one or more of the following three different common methods to assess the value of your business.

  • Market approach. This valuation method compares your business to a similar business that recently sold. The goal is to find a comparable business that shares many of the same characteristics of your business, including location, industry, and size. The market approach is especially common when you are in a competitive industry with plenty of market data to support the valuation. 
  • Income approach. The income valuation approach requires estimating future earnings or cash flows. These projections provide a present value based on future income. However, projections must also take into account taxes, cost structure, growth rates, and other relevant factors.
  • Asset approach. A valuation of your business based on the asset approach is the simplest of the three approaches. Your business’s value is equal to your assets minus your liabilities. However, the difficulty lies in deciding which assets and liabilities to include in the valuation. For example, some analysts include intangible assets that are not listed on your balance sheet such as patents, trademarks, and other intellectual property. 

Business Goodwill as an Intangible Asset

Goodwill is the name analysts use to indicate a company’s reputation, especially when a business has a good name and high name recognition. Goodwill is considered an intangible asset, making it difficult to quantify. However, analysts typically calculate goodwill by subtracting the difference between the fair market value of a business and its purchase price. Ultimately, it’s the premium someone will pay for your business that goes above and beyond the books.

In the context of a divorce, business goodwill can increase the valuation and also factor into decisions about how to proceed with dividing the asset. Goodwill impacts a business on a personal level and on an enterprise level. On a personal level, it matters who qualifies as the face of your business. If your spouse is the face of your business, buying out their interest means your company won’t be the same after they leave. Enterprise goodwill refers to a business’s reputation and branding. The loss of an employee or executive has little or no bearing on this type of goodwill.

Let an Experienced Business Attorney Help You During Your Divorce

If you are worried about losing your business during a contested divorce, let an experienced business lawyer help. The legal team at Stephenson, Chávarri & Dawson understands the importance of protecting your business during this difficult time. Contact us today online or at 504-523-6496 to share the details of your divorce and discuss the best path to protect your business.

 

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