Dividing Your Professional Practice in Your Divorce
When you go through a divorce, you want to be sure you and your soon-to-be-ex-spouse are each getting a fair share of the assets in the marital estate. This can include all or part of the value of your professional practice, even if it was started before the marriage and even if the non-professional spouse never worked there. After the characterization and valuation of the practice, its value will be divided between the two of you.
Make Sure that you Aren’t Being Deceived
Both parties will want to be sure the other is not taking advantage of him or her during this process. The lawyer and/or expert on the opposing side may use unjustifiable methodologies for valuation or might slightly alter methodologies. For that reason, you will want an attorney who will keep a look-out for this since judges may not notice or might assume these methods are okay.
Concerns for the Non-Professional Spouse
As the non-professional spouse, you will want to work with your attorney to be sure your partner isn’t hiding income. He or she may attempt to devalue the business by “losing” income to expenses paid to fake vendors, for example. To avoid facing hidden income during the trial, your lawyer and valuation expert will work to “normalize” the practice’s income during the evaluation phase in addition to examining all documents carefully.
Concerns for the Professional Spouse
As the professional spouse, you want to be sure the opposing side is not attempting to harness future earnings, perhaps disguised as part of the business goodwill. Texas law does not allow the division of future earnings, so this type of argument should be called out at court. Also, you should remember to base the valuation on profit, not on “gross receipts” or revenue, to be sure you are accounting for costs and not over-valuing the business.
Documents Needed and Protecting Confidentiality
The court will need to examine certain sensitive materials to confirm the valuation and divide the value. For example, the court may need to see financial statements, federal income tax returns, accounts payable reports, or other forms.
For practices that record sensitive client information such as law and medical offices, patient or client confidentiality is of concern during the discovery phase of the valuation.
For law firms, attorney-client privilege might be used as an objection to accessing certain documents or files. For medical practices, there are similar privacy concerns in violating HIPAA.
In the past, Texas courts seemed to rule that the case’s involved parties should have access to such files for valuation, but it is unclear how the court might rule in the future. Thus, a confidentiality agreement may be necessary. Other steps may be taken during the case to protect the confidentiality of the practice’s clients like removing identifying or personal information from shared documents and removing information that isn’t related to valuation.
How Are Professional Licenses Handled in Divorce?
A person’s professional license is not subject to division during the valuation and division process of a divorce settlement in Texas (Frausto v. Frausto, 611 S.W.2d 656 (Tex.Civ.App.–San Antonio, 1980, writ dism’d)). In other words, a value can’t be assigned to a Medical Doctor license or Law License. Although these are obviously precious assets, Texas law doesn’t allow them to be valued. They are ‘personal’ to the person with them and therefore can’t be divided.
Most of the time in the division of business value, the professional spouse keeps the practice and either “buys out” the other party with compensation equal to his or her fair share of the value, or is ordered to give a “just amount” of other marital property to balance out the business value lost during the divorce. Courts generally won’t split ownership of the practice between the two parties because the idea of divorce is to “untangle” financial connections to each other.
Overall, if you are the professional spouse, you will want representation with experience and knowledge in the valuation of businesses to be sure you don’t lose an unfair share of your business’s value in the divorce. If you are the non-professional spouse, you will also want to work with an attorney to advocate for the value of the business you deserve.