A few years back, I represented a woman whose husband owned a landscaping company. On paper, the company was losing money. According to his tax returns, he made less than his employees.

But the family lived in a nice house in East Memphis. There were two late-model trucks in the driveway. The kids went to private school.

Something did not add up. That is what discovery is for.

Business ownership in a divorce is where things get complicated in a hurry. Not because the law is unclear. Tennessee is an equitable distribution state and a marital interest in a business is marital property subject to division, same as everything else. The complication is the valuation.

You cannot look up what a small business is worth the way you can look up a stock price. And that ambiguity creates room for disagreement, delay, and, if someone is not being honest, manipulation.

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How Business Valuation Works

Courts use forensic accountants and business valuation experts to determine what a business is worth. There are generally three approaches: the income approach (what does the business earn), the market approach (what would a buyer pay for a comparable business), and the asset approach (what are the underlying assets worth minus liabilities).

Which method produces the most accurate value depends on the type of business. A service business built around the owner’s personal skill set is valued differently than a business with significant hard assets or a stable, transferable client base.

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The Goodwill Question

Tennessee courts distinguish between enterprise goodwill and personal goodwill. Enterprise goodwill is attached to the business itself and survives ownership changes. It is marital property. Personal goodwill is attached to the individual owner’s reputation and relationships. Tennessee courts have generally held that personal goodwill is not subject to division.

For professional practices, the personal vs. enterprise goodwill distinction can significantly affect the valuation number.

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When the Books Look Wrong

Self-employed spouses sometimes have creative approaches to reported income. Cash transactions, personal expenses run through the business, inflated business costs. Discovery in these cases gets detailed. Tax returns, bank statements, credit card records, Quickbooks files.

If the numbers do not add up, say something to your attorney. I, Bill Jones, have worked with forensic accountants on dozens of cases where what was disclosed did not match what was real. A forensic accountant is not a luxury in these cases. They pay for themselves.

Lawyer Bill’s Advice

A business interest is not a liquid asset. You cannot split a business the way you split a bank account.

Get a real valuation from a qualified expert.

And if the business owner in your marriage has been less than transparent about the finances, discovery is your friend.

The numbers are in there somewhere. A good forensic accountant finds them.

If you have questions, reach out at midsouthdivorce.com/ask-lawyer-bill/.

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About the Author: William W. Jones IV is a Memphis family law attorney, Rule 31 Listed Family Mediator, and Super Lawyers selectee every consecutive year from 2014 through 2025. Licensed in Tennessee (BPR 022869) and Mississippi (BPR 100707), he practices at The Jones Law Firm, 5100 Poplar Ave, Suite 708, Memphis, TN 38137. Call (901) 761-5353 or visit midsouthdivorce.com.