Dividing a Business in a Tennessee Divorce

From The Mid-South Divorce Guide, chapter 16, by William W. Jones
IV, a Memphis family law attorney and Rule 31 Listed Family Mediator
licensed in Tennessee and Mississippi. This guide covers Shelby, Tipton
and Fayette Counties in Tennessee and DeSoto, Tate and Tunica Counties
in Mississippi.

Questions this page answers

• How is a business valued in a divorce?
• Is my spouse entitled to half my business?
• How do you find hidden income from a business in a divorce?
• What is goodwill in a business valuation?

If you or your spouse owns a business, a professional practice, or a
meaningful interest in a closely held company, your case is more
complicated and more expensive than the average case. That is just
true.

The problem

A business that is not publicly traded has no obvious value. Nobody
publishes a price. So the value has to be established, usually by an
expert, and reasonable experts disagree by large margins.

Three common approaches. Asset based, meaning what the business owns
minus what it owes. Income based, meaning what it earns capitalized into
a value. Market based, meaning what similar businesses have sold for.
Which method applies depends on the business, and this is genuinely
contested territory.

Goodwill

Business goodwill is generally treated as a divisible asset. Personal
goodwill, meaning value that exists only because of the individual
professional’s reputation and skills and would walk out the door with
them, is treated differently. In a solo professional practice, a large
share of what looks like value is personal goodwill. This distinction is
worth real money and it is a fight worth having.

What to expect

You are likely going to need a valuation expert, and possibly a
forensic accountant if there is a question about whether the books
reflect reality. Expect to pay thousands. Sometimes tens of thousands.
Sometimes the two sides retain separate experts and each side’s expert
reaches a number the other side hates.

Sometimes the right answer is to agree on a joint neutral expert. It
cuts the cost roughly in half and it removes the dueling-expert circus.
It also means you are stuck with a number you did not choose. Talk to
your lawyer about whether that trade makes sense in your case.

Your
spouse is not the first person to think of this

Almost every client with a self-employed spouse arrives believing the
same thing. That their spouse is the single smartest, sneakiest small
business owner who has ever lived, that they have been quietly moving
money around for years, and that nobody is ever going to catch them.

Let me take some of that off your shoulders.

Start with this. There is a meaningful difference between what a
small business owner tells the IRS and what that same person tells their
own divorce lawyer. The story gets a lot more honest once somebody
realizes that understating income to save on taxes is about to be used
to argue they cannot afford support. People talk themselves into a
corner on that one about as often as they talk themselves out of it.

Then consider the audience. Judges in this district see small
businesses constantly. Contractors, restaurants, trucking outfits,
medical practices, salons, landscaping companies. They have heard the
story about the truck that is really a business expense and the trip to
Destin that was really a conference. It is not new information in that
courtroom.

And consider your lawyer. Most attorneys are small business owners
themselves. I run one. So if there is a trick for moving money through a
closely held business, running personal expenses through it, deferring
receivables until after the divorce, putting a girlfriend on payroll, or
paying a relative for work that never happened, the odds are excellent
that the lawyers in the room have seen it, figured out how it works, and
in some cases tried a version of it on their own books.

We will find it. Bank statements, tax returns, merchant processing
records, and a forensic accountant who does this for a living are hard
to talk your way past.

So bring me your suspicions and bring me the specifics. Just do not
walk in convinced you are beaten before we have looked.

The owner spouse’s problem

If you own the business, understand what is coming. Your books are
going to be examined. Personal expenses that ran through the company are
going to be found, and every one of them is going to be added back to
your income for support purposes. The truck, the phone, the meals, the
trip that was mostly a vacation.

I say this without judgment because it is normal small business
behavior. But it is going to come out, and it is far better to disclose
it and explain it than to have opposing counsel present it as fraud.

Download the whole guide. All 35 chapters plus four blank client forms, complimentary, no email required. Download The Mid-South Divorce Guide (PDF)

Questions about your own situation? The Jones Law Firm, 5100 Poplar Ave, Suite 708, Memphis, TN 38137. Call (901) 761-5353.