Common Problems in Valuing a Professional Practice During a Divorce

Walters Gilbreath, PLLC

Valuation of a professional practice is rarely a simple process. In many cases, it will be a lengthy and complex one. When divorce is involved, the process can become even more difficult. Here, I will discuss some of the common problems that crop up when valuing a professional practice. Mainly, I will discuss transfer restrictions and how they affect the non-involved spouse, the effects of buy-sell agreements, and dirty tricks that you might run into.

Transfer Restrictions

Many corporations have bylaws in their agreements that restrict the transfer of interests or shares. In divorce, this can have implications for the non-involved spouse. One important question to ask is if these bylaws apply to the non-involved spouse or not.

In Earthman’s, Inc. v. Earthman, 526 S.W.2d, 192, 196, this issue came up. The wife in a divorce was given 21% ownership of her husband’s company in divorce. But, when she requested share transfer to her name, it was denied. The denial was based on share transfer restrictions. Upon appeal, the court found that the transfer restriction doesn’t apply unless there is a specific provision within the restriction itself. So, in the appeal, the court found that the restrictive provision did not apply to the non-involved spouse.

Then, in Messersmith v. Messersmith, 86 So.2d 169 (La. 1956), the court said that a husband needed to give his wife the interest from the business awarded by the court in their divorce decree.

Still, there are certain issues related to the enforceability of the transfer restrictions when it comes to non-involved spouses. First, consider whether the spouse has signed any agreements that allow such restrictions. Then, you need to consider the nature of the agreement signed. If you are the non-involved spouse hoping to obtain shares, you should contact an attorney to assist you.

Buy-Sell Agreements

Many partnerships contain buy-sell agreements. These agreements occur between shareholders and partners to protect these parties and make sure that the business is well run. These agreements will also usually include provisions for stock or interests to be bought at a certain price.

In divorce, buy-sell agreements can come into play. These agreements are triggered when a shareholder or a partner gets divorced. Also, non-involved spouses often sign these agreements. Then, when the couple gets divorced, the spouse who is not involved in the business has a say in these agreements. The binding effect of these agreements has become an increasing concern in Texas divorces.

Case law has established that a buy-sell agreement defining the value of the business’s interest limits the value of the interest that may be awarded in the divorce. If you face a buy-sell agreement, you need to consider the binding effect of the transfer restrictions that this agreement has. Contacting a lawyer can help you through this situation.

Dirty Tricks

When it comes to valuation of a business and divorce, one party might try to play dirty tricks to get more out of the divorce. A few common dirty tricks include:

  • Hidden income.
  • Improper valuation methods.
  • Intentional devaluation
  • Partnership conspiracy to defraud.

While you might not want to believe that your spouse would hide income and assets from you, this does happen in divorces. A business owner might claim that income is “lost” within the business and write it off so that their spouse can’t get it. If you are the spouse who is not involved in the business, watch out for this issue.

Another issue is improper valuation methods. Sometimes, estimates of value are unfounded or inaccurate. Both sides in a divorce should carefully look at the valuation of the other party and make sure that it is accurate.

The intentional devaluing of a company is also not allowed. If this happens, the other spouse could get compensation for the division of property.

Finally, partnership conspiracy to defraud is a dirty trick that can be used in divorce. A spouse has to prove that their spouse, who is involved in the business, engaged in a conspiracy with the partnership to terminate the spouse’s position and defraud the non-involved spouse. If this can be proven, the non-involved spouse will receive assets in the divorce.

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