guest column

Houston lawyer: How to navigate business valuation and divorce in uncertain times

Divorce is never easy, but here's how to navigate it with your business in mind. Photo via Pexels

We all hoped that, once the pandemic had waned, we would return to a more normal, predictable economy, but it seems that we are confronted now with even more unpredictability in what economists have dubbed the “uncertainty economy.” Very few people are able to choose the best time to divorce on the basis of finances, but the current environment can make evaluating the worth of stock options, a closely held business or even real estate highly challenging.

For one thing, the pandemic itself lingers. Some businesses—bicycle manufacturers and bicycle shops, for instance—experienced boom times during the pandemic. Other businesses—restaurants and businesses at tourist locations, for instance—suffered greatly, limped along, or even closed for good. Now, instead of settling into a steady hum again, our economy is coping with inflation, the rising cost of labor, supply chain tangles, and the ripple effects of the war in Ukraine and sanctions against Russia. The situation is still fluid. What works today may not work well tomorrow. What doesn’t look promising today may be much more successful tomorrow.

In a divorce case in which significant financial assets are involved that are community property, a family lawyer will bring in a trusted professional business or property evaluator—whatever is appropriate for the particular situation. Evaluating a closely held business is often the most difficult issue—more difficult than, say, dividing the value of real estate or stock in a publicly traded company. Three different methods can be applied to a business valuation: the market approach, the income approach, and the asset approach. The business evaluator will judge which to use, singly or in combination.

Much will depend on the ownership agreement as expressed in formation documents, whether the owners be investors, business partners or family members. These documents generally provide in some way for what will occur in the case of a divorce or a death. Generally, co-owners do not want to have to deal with an inexperienced ex-spouse or widow/widower who abruptly becomes part-owner of the business or practice (in the case of a doctor or lawyer in a partnership). The spouse who is in the business also has to consider tax issues and his or her fiduciary duty to other owners. And courts are not allowed to simply give corporate assets or debts to one party or the other in a divorce.

Generally the spouse involved in the closely held business will have three choices available: continue to own the business with the ex-spouse (maybe they already work together and have a decent working relationship), sell the business and divide the profits, or offset the value of the business ownership with other property if other assets are available. In Texas, “personal goodwill” as part of a business is not community property. It attaches to the person who created it. But the business may have “enterprise goodwill”--the value of the business apart from the individual owner--which may be community property.

None of this addresses the issue of the fluidity in the current economy. Divorce agreements can allow for that in the form of contingency agreements. For example, a business owner may be dealing with a specific potential liability. The divorce agreement may provide that, for a given period of time, the business owner is allowed to set aside a certain amount of money to address the liability if it arises. If it does not arise, after a certain period of time, the money will be divided between the two former spouses. Or let’s say a business asset with limited liability or future involvement that is part of community property may be sold in the future. A divorce agreement can provide that, if the asset is sold, the profits will be shared. Clawback provisions can be included, as well, to provide for future adjustments. This will require extraordinary drafting skill.

There is another option as well and that is to wait for more settled times. But the two spouses may have radically opposed views as to the “best” time for the divorce. The spouse who earns less may want to divorce when community property values are at their highest; the other spouse will want to split when community property values are at their lowest. In either case, they would do well to consult experts in family law and business valuation experts before deciding on when to set a divorce in motion.

------

Susan Myres is a Houston-based, board-certified family law attorney at Myres & Associates and has over 35 years of experience.

Trending News

Building Houston

 
 

With the consumer price index rising 9.1 percent since last year, many Americans are evaluating new employment opportunities with better pay. However, employees would be wise to consider the risks of accepting a new position in the face of inflation and a possible recession, which could leave employers unable to sustain higher wages and generous benefits.

As a safer option in the longterm, employees may wish to ask for a raise from their current management, yet many do not know how to start the conversation. By understanding best practices for negotiations, employees can improve their chances of obtaining a pay raise without undermining relationships.

Understand the risks of job-hopping

Conventional wisdom suggests that job hopping can result in higher salary increases than an annual raise. During the pandemic, many employees took advantage of labor market shortages to secure new positions for higher pay. However, job hopping presents risks, particularly in an uncertain economic environment. Companies may institute “last in, first out” layoffs, leaving recent hires unemployed.

Even in strong economic conditions, job-hoppers face uncertain outcomes. When employees leave a company, they may leave behind teammates, mentors, client partnerships and friendships years in the making. These relationships can redevelop in a new organization, but employees may find themselves in an unfamiliar setting, facing unrealistic expectations or unexpected challenges that were not clear during the interview process.

Prepare ahead of time

Before approaching management with a request for a raise, employees should understand their own financial needs and how much additional compensation would improve their finances. If inflation has caused financial strain, employees should gather recent data on inflation, including the consumer price index, to share with management. The more information employees can offer about changing economic conditions, the more management will understand and accept their position.

Focus on the positive

Employees should begin a conversation about salary with praise for the organization and a reiteration of their commitment to the team. By beginning on a positive note, employees set the tone for a mutually productive conversation. Although employees may view salary negotiations as adversarial across the table, productive negotiations are a conversation with both employee and employer on the same team.

Likewise, while employees may worry about looking greedy, employees should not let that fear prevent them from opening the conversation. Employers also understand that employees work to meet their financial needs. While employers may face budget constraints or other considerations in salary allocation, strong management also recognizes the importance of nurturing growth among employees, both in compensation and job responsibilities.

Nonetheless, employees should focus the discussion on broader economic conditions like inflation, not on their personal budget items. By acknowledging the economic environment outside of the employer’s control, employees can then respectfully request their salary be adjusted for inflation.

Employees with a record of strong results can also gather data or performance reviews to demonstrate their contributions to the team beyond the expectations of their role. In doing so, employees can frame a salary increase as a celebratory recognition of the mutually successful partnership between employee and employer and an investment in the relationship.

Be flexible if negotiations stall

If employers decline to adjust an employee’s salary for inflation, employees should not give up on negotiating additional compensation or benefits. Rather than a pay raise, employees can ask for reimbursement for gas mileage or additional remote days to cut down on their commutes. If management declines a pay raise based on timing, employees can acknowledge that management may face budgetary constraints, remaining flexible but firm. For instance, a compromise may involve revisiting the discussion in three to six months.

As employees face record-breaking inflation, it remains critical to consider the risks of departing one role for another. By implementing best practices in salary negotiations, employees can secure a salary increase that matches inflation, avoid the uncertainty of job-hopping and invest in the future at their current company.

------

Jill Chapman is a senior performance consultant with Insperity,a leading provider of human resources and business performance solutions.

Trending News