Top 5 Concerns for Business Owners During Divorce

Focus Family Law

Top 5 Concerns for Business Owners During Divorce

BY SPENCER PAGE AND ADAM MUNDT

While divorce is a tumultuous process for nearly everyone, business owners stand in a unique position in that their livelihood—the business they built—is simultaneously a source of their income and an asset often subject to division. During divorce, business owners face strict limitations on their actions and are forced to make difficult decisions that could impact their ability to support themselves for years to come. With so much at stake, effective legal representation is paramount to assuage business owners’ concerns and protect their livelihood.

Hamstrung Business Management

In many counties in Texas, divorce courts impose “Standing Orders” that go into effect immediately upon the filing of a divorce suit. These Standing Orders impose numerous restrictions on both spouses, including the ability to conduct their business. The purpose of the Standing Orders is generally to preserve the status quo and to protect the parties’ property. This can often impair a business owner’s right to make decisions to navigate changing economic conditions, unless they want to risk being held in contempt for violating the Standing Orders. While a business may need to deviate from its usual business activities, these Standing Orders need to be considered before acting contrary to the status quo.

Sale of, or Inability to Sell, the Business

Similarly, the Standing Orders often prevent the sale of assets owned by either spouse. This would include an ownership interest in a business. Even if the businessowner spouse receives a once-in-a-lifetime offer for their business, they face contempt of court and potential reconstitution claims if they sell the business without their spouse’s consent.

On the other hand, a divorce court could order their business interest sold against their will simply to ensure that both spouses receive a just and right division of the community estate. This is similar to ordering a house, car, or other asset sold and the proceeds split. This is an uncommon and severe remedy but sometimes becomes the reality.

Characterization

Characterization refers to whether an asset is considered separate or community property. While this is an issue with any asset, the importance of characterization is highlighted with ownership interests in businesses, which are often one of the largest assets owned by either spouse. If the business-owner spouse’s interest is deemed separate property, then they will walk away from the divorce with the interest intact. However, if the interest is community property, the business-owner spouse could find their interest split, sold off, or overvalued. Some spouses unwittingly contribute separate property assets into a community property business and cause the separate assets to lose their character.

Business Valuations

Often, the value of a spouse’s business interest is the most hotly contested issue in a divorce. When a court divides the community estate, it generally does so with reference to the value of each asset and debt comprising the estate. It is not required that the division be completely equal, but courts often end up awarding spouses equal or near-equal portions of the community estate. For this reason, the value of a business interest is paramount. Some business owners attempt to manage the process by which their interest is valued at divorce through a buysell agreement in which the non-owner spouse signs a consent. These types of agreements are generally enforceable. However, if the non-owner spouse did not consent to the terms of the agreement, then the non-owner spouse may have claims against the owner spouse such as breach of fiduciary duty.

Dragging the Business into Litigation

A final concern that many business owners have during divorce is the risk that their business becomes entangled in the divorce litigation. It is not uncommon that the non-owning spouse may allege civil causes of action against the business itself, such as fraud, breach of fiduciary duty, etc. If that is the case, the business must now defend itself against these claims, which can be costly for the business. Furthermore, the business-owner spouse then must contend with the possibility that a judgment may be entered against their business.

While a divorce may seem like a business-owner’s worst nightmare, many of these concerns can be minimized or avoided altogether with proper planning and effective counsel. In our experience, we often see business owners taking the steps necessary to achieve a favorable result and come out the other side unscathed. So, although these five concerns should be in the back of every business-owning spouse’s mind, prudent attorneys can help prepare a business owner to either avoid or contend with these concerns. HN

Adam Mundt is a Senior Associate at McClure Law Group, PC, and a licensed CPA. He can be reached at amundt@mcclure-lawgroup. com. Spencer Page is an Associate at the firm and can be reached at spage@mcclure-lawgroup.com.

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