Being a business developer or entrepreneur likely means that you are comfortable taking measured risks and venturing out on your own to follow through on an idea or product. Part of that equation means being able to determine that you are comfortable taking on risks now for a benefit later on in your life. Your plan may have involved taking on this type of risk to benefit you and your spouse. However, if it is becoming clear that a divorce is forthcoming then your previously conceived plans may no longer be pertinent. However, the business that you helped start-up and currently own maybe come subject to division in your divorce as being part of the community estate.
Part of dividing up your startup company in a divorce means determining the value of the business. This can be a fairly complex process for multiple reasons. The first of which is that startup businesses can be particularly hard to determine their value given that most businesses that are divided in the divorce context are more longstanding and established companies. It is easier for an expert at business valuations like an accountant or for a business broker who is trained to sell businesses to determine an approximate value of your business when it is better established.
Another factor to consider is the type of business that you own. Throughout most of history, businesses that have been created provide either a good or a service where its tangible value is somewhat simple to calculate. You can add up all the widgets you have in stock, the number of jobs you have scheduled for the next year, and so on to determine an approximate value. Throw in some goodwill value towards your name in the name of your business in the community and you can have a sharp idea of the type of Value to be assigned to the business.
However, currently, with so much of the world being digital it can be much more complicated to calculate even an approximate value of your business based upon the circumstances of your case. Even finding similar businesses to yours if you provide a unique or relatively new product or service can be difficult. All these factors combined mean that the term inning the valuation for your startup can be an incredibly important part of your divorce case. If the business was created while your marriage, then it is more than likely going to be classified as Community property. For that reason, you need to be accurate in terms of how the business is valued so that you can negotiate with your spouse from there.
This is the part of a case that I think is an incredibly important period I have seen many divorce cases that I believe should have been settled in mediation or during informal settlement negotiation that was not able to be closed out due to one or both parties not coming prepared to mediation with relatively accurate figures on issues like the valuation of a business. The moral of the story is that the more accurate you are with your figures at mediation the better chance you have at arriving at an inequitable solution for all parties. The consequence of not settling your case means that you are relying upon a judge, with the assistance of probably multiple expert witnesses in a trial, to determine how your business should be divided.
After all the work that you put into creating this startup business, you could see all of that fall by the wayside as a family court judge with little knowledge of your business divides it up between you and your spouse, potentially. This could be a disaster both financially and emotionally for you. Rather than put yourself through this type of circumstance I would recommend that you work directly to be as prepared as possible during all phases of your case. This can begin with discovery. Discovery is a portion of your case where your spouse and their attorney will be able to request documentation and other information about your business. The more prepared you are for their requests the better off you can be. The less prepared you are the more you will spend on attorney’s fees as your attorney and their staff have to help you collect documents and other figures that your spouse will be asking for.
For instance, you should make sure that your accounting and taxes are up to date. If you have not already hired an accountant or CPA to work on your team and that might be something you should consider. Acting as your bookkeeper with the software on your computer may work well but for a divorce, you may need to step it up and have someone with experience and knowledge beyond what you possess to take a look at the case and start to get a feel for what shape your books are in as well as what type of valuation might be fair for your business all things considered. It is up to you how well prepared you to want to be for your case. However, I will tell you that I’ve never seen a person be too prepared for the negotiations then regard to your small business.
Think back to the time when you started your company. All the hours spent and time lost pursuing other endeavors. If you fail to prepare adequately for your divorce you risk losing a substantial percentage of your business. Even if you do not end up losing part of your business to your spouse you may end up having to pay him or her an equal amount of value from other areas of your community estate. I am not saying that money is everything, but I am saying that it is silly to give up thousands of dollars needlessly. Working with an experienced family law attorney with the Law Office of Bryan Fagan can ensure that you are thoroughly prepared with valuation figures for your business. from there, you can have a better idea of how to negotiate with your spouse in terms of dividing up the community estate of which your startup is a part of.
What are the typical stages of a small business?
It can be helpful for you to determine what stage of the lifecycle your business is in to understand how to proceed in terms of settlement negotiations and evaluation for your business. A divorce may hit you right as your business is being created or while your business is in a primitive state. Other times you may have a well-established and mature business and find out that your spouse has filed for divorce against you. No matter where your small businesses are at the time of divorce you can feel prepared by understanding where your business is in terms of its lifecycle and what that means in the course of your divorce.
First, an extremely new startup business has no product revenue, little to no expense history, and has not yet developed its management team. This could be your situation if you have an outline of a service or product that you would like to offer the marketplace, but I’ve not yet begun selling anything. You may have a prototype of a product and are working on building a few more to gauge the interest of your community but have not yet begun selling them at the market at any appreciable scale. This can be a stage where many businesses fail given that people make mistakes in having more of their product created than there is necessarily a market for. A business coach may caution you at this stage to be as patient as possible and to create a market for yourself first period this is true rather than assuming that a market will create itself after you have inventory in place.
if this is where you are in the lifecycle of your business then there probably is not much to divide in the context of a divorce. Establishing a value of a very early startup company is very difficult to do. Not only have you no management team or framework of your business setup but you have never sold a product. In that case, it can be nothing but projection when it comes to determining the value of your business. While your business may have some promise it currently has no profits, no inventory, and no goodwill in the community. Since these are the major areas where value is derived from there may not be much to divide in terms of your small business.
This next stage is probably the most precarious for your business. A second stage sees a greater development in the framework for your company but still no product revenue and now a greater expense history related to attempting to develop a product. This is what I was alluding to in the prior step where you may have outkicked your coverage so to speak in terms of spending money on the creation of a product or service without yet having established a market for it. If you borrowed a substantial amount of money to create your business, you may have very little operating capital on hand and maybe headed towards bankruptcy or something close.
Again, outside of determining your loan values and perhaps a little bit more regarding inventory value there probably isn’t much to determining the value of your startup company at this stage. You may be in the unfortunate position to have a negative value for your business if you have not yet sold anything and have only operating expenses and loans to set forth as far as your valuation is concerned.
If you and your business can make it past these initial stages, you have probably done so by making progress in developing a product. Maybe you were able to create a small number of products for sale at the wholesale level or have been selling a few products here and there on the Internet. If you are providing a service rather than creating a product you and your small team of employees may have been working in the community on a shoestring budget to determine whether there is an actual market for your service. Either way, as you inch closer to the production of your product in the marketplace it is becoming clearer that your business has an actual value rather than something hypothetical.
However, it is still likely that your business has a negative value given that no sales have been made. It is incredibly difficult to operate a successful business. Many people will call themselves self-employed or business owners when in fact they own a hobby or simply own a job. One way to look at it is if an outside investor bought your company from you what would the investor have to pay to operate the business from afar. If the investor did not want to take over your role, what would he or she have to pay someone to take over what your job used to be? If after paying that person to take over your job, there is no profit left for the investor then you would know pretty clearly that you do not own a business but rather own a job.
The fourth stage of the business life cycle is similar to the third period while you have certainly carved out a niche for yourself in the community as far as your product or service is concerned it is still not yet time to call your business a success Given that you have not sold enough product or offered enough services in the marketplace to outproduce the costs and loan payments that you may have taken on to create the business. The operating costs of a business can be significant. This is true especially if you are producing a product whose parts are expensive or the labor required to produce the product cannot be found easily.
The final two stages of a small business or startup or where you truly see success for a business owner and their employees. Stage five involve product or service sales showing consistent growth where are you have more money in sales than in loan payments and overhead costs. In accounting terms, you are more in the black than you are in the red at this stage. Your employees are being paid, your vendors are being paid, you can draw a salary of some sort with enough money left over for operating expenses and retained earnings. You may have hired an accountant to assist with financial issues or even hired a chief financial officer or accountant to help with the money.
Finally, stage six is a continuation of the success you have experienced since stage five. Your market for selling your product or service may have grown over the years and you may have even begun to sell multiple types of a product. Whatever your situation is you have a profitable small business. This means that your spouse would be foolish not to inquire as to the value of the business in terms of being able to determine your average yearly profits, losses, and how this question fits into the overall issue of dividing your community estate.
Most business valuations are performed well into this final stage of the business life cycle. If you or your spouse are attempted to value your company very early on there is no historical precedent or numbers to compare to. In those early stages rather than relying upon profits, a business valuation expert would probably look to your company’s business plan, financial forecasts, information regarding investors, your history of creating successful businesses elsewhere as well as other factors that are dependent upon your specific circumstances in the specific type of business that you operate.
This is incredibly important to discuss and is not something that you should necessarily assume that you can figure out on your own. Rather, I think it is important to consider the role of an experienced family law attorney in helping you create a game plan for success in your divorce. It is not enough to rest on your laurels and assume that because you were able to create a business that you will be able to divide the business successfully. Your spouse might not even be interested in any part of the business but will certainly be interested in being able to retain his or her share of the value of the business that was created during your marriage.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultation six days a week in person, over the phone end via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family circumstances may be impacted by the filing of a divorce or child custody case.