Legal Issues Involving the Division of Closely-Held Business Entities in a Divorce

When a married couple gets divorced, they can spend a lot of time and energy litigating how their property and assets will be divided. The division of tangible property and assets can range from a relatively straightforward task to one of great complexity. Divorces involving more high-value and complex assets, such as the ownership interests in a business, can be challenging. This is particularly true for family businesses in the form of closely-held business entities. To understand the legal implications of dividing a closely-held business entity, it is necessary to understand how Texas law divides business interests in general.

Characterizing Businesses in General

Division of businessTexas uses the community property system of dividing property in a divorce case. Community property is subject to a just and fair division between the parties upon their divorce. All property acquired during marriage constitutes community property unless clear and convincing evidence demonstrates that a particular asset is the separate property of a party. All property a party acquires before marriage and after divorce qualifies as their sole and separate property. Additionally, property that a party acquires in their name during marriage by way of gift, bequest, or settlement of cases, will be considered their separate property.

Accordingly, a person’s business interests can be characterized as either community or separate. Business interests that are characterized as community property are subject to a just and fair division by the court upon divorce. Furthermore, the growth of an otherwise separate business can take on a community property characterization if such growth can be attributed to the use of community funds or the efforts of the non-owner spouse.

Valuing the Stock of Closely-Held Business Entities

Ownership interests in a closely-held business entity can involve peculiar property division issues. Under Texas Business Organizations Code § 21.563, a closely-held business entity is one with fewer than thirty-five (35) shareholders and no publicly exchanged stock.

While it is relatively easy to value publicly traded stock, shares of a closely-held business entity require a more involved approach to appraisal. For instance, determining the fair market value of stock belonging to a publicly traded company is a reasonable valuation approach because the stock has a listed price on a national exchange or stock index.

In contrast, the market value of shares from a closely-held business entity cannot be gleaned from public listings. Alternatively, the actual value of stock in a closely-held business entity can be established using expert evaluation and subsequent testimony. This methodology can be particularly useful for appraising closely-held business entities that are subject to stock restrictions where company shares may only be transferred to the shareholders of the company at book value. The book value of an entity’s stock is generally derived from the difference between its total assets and total liabilities, divided by the number of issued shares.

Valuing Non-Stock Closely-Held Business Entities

Closely-held business entities without stock are valued differently. Your attorney will likely hire an expert to conduct a business valuation so that the company can be divided in a fair and just manner after considering both the asset valuation and market valuation of the entity. Asset valuation is a more straightforward subtracting of liabilities from assets; whereby market valuation will look at what the business might sell for. Market valuation will take into account current sales, client lists, and other factors to determine what a third party might be willing to pay. This method is similar to appraising real estate when buying or selling a home or other property.

Valuing Goodwill

Goodwill is considered an intangible asset of a company that is attributed to its business reputation. Recognition and value of the business entity’s brand name, customer base, its reputation among customers and employees, as well as any proprietary technology and intellectual property rights, are components of a company’s goodwill. Goodwill is considered to be just as important to a company’s value as its tangible assets and capital.

Texas courts have consistently held that goodwill that can be attributed to a spouse who doesn’t own stock in a closely-held company is not a divisible asset in a divorce case. As a result, the valuation of a closely-held business entity that accounts for goodwill as an asset must isolate and specifically attribute it to each party.

Get Legal Advice from Coker, Robb & Cannon, Family Lawyers Today

When it comes to divorce cases involving complex property division matters, it is in your best interests to consult an experienced attorney for legal advice. At Coker, Robb & Cannon, Family Lawyers, our dedicated team of attorneys can help you understand the complexities of dividing certain assets in your divorce, including the stock of closely-held corporations.

For more information about how we can help you, call Coker, Robb & Cannon, Family Lawyers at (940) 293-2313 or contact us online today.

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