Dividing property is often one of the most time-consuming parts of the divorce process. This is especially true when one or both spouses own a business. In Tennessee, particularly Memphis, courts look closely at how to handle business interests fairly. Whether it’s a family shop, a medical practice, or a large company, assets must be valued before they can be divided.
For legal guidance, as you go through your divorce proceedings, reach out to an experienced divorce attorney. I, Theresa D. Childress, serve residents of Memphis, Tennessee, and throughout Shelby County, Tennessee.
Before a business can be valued, it must first be classified. In Tennessee, courts divide marital property, not separate property.
Marital Property includes assets acquired during the marriage, including businesses started or grown during that time.
Separate Property includes assets owned before the marriage or acquired through inheritance or gifts.
If one spouse started the business before the marriage, but it grew substantially during the marriage, some or all of the increased value might be considered marital. Contributions from the non-owning spouse—such as working at the business, managing household duties, or providing financial support—can influence how the court treats the business.
This distinction is important because it determines whether the business is part of what will be divided.
Once it’s clear that a business is marital property, the next step is determining how much it’s worth. Business valuation gives the court a clearer picture of the asset’s financial value so it can divide property fairly between the spouses.
Valuation affects not only the division of property but also other aspects such as alimony and child support. For example, if the business produces a significant income stream, that income may be considered when calculating support obligations.
Courts usually rely on financial professionals to conduct valuations. These individuals gather relevant documents, apply accepted methods, and provide an impartial estimate. The court may accept one valuation or review several if both parties submit their reports.
In some cases, the judge may appoint a neutral party to value the business. This often happens when the parties can’t agree on a number or when there are disputes over records or methods.
There are three common methods for valuing business assets during a divorce. Each is used based on the business’s structure, performance, and available data.
This method totals the business’s tangible and intangible assets and subtracts its liabilities. It works best for companies with significant physical property, such as manufacturing businesses or real estate holdings.
Key components of this method include:
Equipment and inventory
Accounts receivable
Intellectual property
Outstanding debts
This approach often results in a conservative value and doesn’t always reflect the business’s ability to generate income.
The income method looks at the business’s past and expected future earnings. It adjusts those figures to reflect the current market and uses a capitalization or discount rate to calculate value.
This method suits businesses with a steady income, such as professional practices or service providers.
It considers:
Gross revenue
Operating expenses
Owner’s compensation
Adjustments for market risk
The income approach is often more accurate for active businesses that generate ongoing profits.
This approach compares the business to similar ones that have recently been sold. It’s often used when there’s reliable data on comparable sales in the same industry and region.
Valuation professionals will review:
Sale prices of similar businesses
Industry multipliers
Market conditions
This method is less effective for unique businesses without clear comparisons.
Each business is different, and several factors can influence its value in a divorce. Courts and professionals look at a wide range of details, including:
The business’s size and structure
How long it’s been operating
Financial statements and tax returns
Client or customer lists
Dependence on the owner’s efforts
Future earning potential
Market demand and industry trends
In cases where one spouse is the face of the business—such as a doctor or attorney—the value may be adjusted based on how dependent the income is on that individual’s reputation and efforts.
Goodwill refers to the value a business gains from its reputation, client loyalty, and other non-physical traits. In Tennessee, there are two types:
Personal Goodwill is tied to the individual owner and generally isn’t considered a marital asset.
Enterprise Goodwill belongs to the business itself and may be included in the valuation.
Distinguishing between the two can be difficult. Courts weigh whether clients would continue using the business if the owner left or sold it. If the answer is yes, enterprise goodwill likely exists and may be subject to division.
Once the business is valued, the court will decide how to divide it. The actual division depends on the facts of the case, including each spouse’s role in the business and their financial situation.
Here are common options:
This is the most common solution. The court awards the business to one spouse and orders that spouse to pay the other a lump sum or installment payment based on their share of the value.
If neither spouse can or wants to keep the business, it may be sold. The proceeds are then divided according to the court’s ruling.
In rare cases, the court may decide that both spouses will continue owning the business together. This is more likely if the relationship is civil and both parties play a role in operations.
Co-ownership can be difficult and is usually not a long-term solution.
While this article focuses on what happens during divorce, some people take steps beforehand to protect a business.
For instance, a prenuptial or postnuptial agreement may outline how the business should be treated if the marriage ends. These agreements can help avoid disputes later on.
Business owners also sometimes limit their spouse’s involvement or maintain separate financial records to support the argument that the business should remain separate property.
In a contested divorce, each party may present their valuation, often leading to disputes. The court must then decide which is more accurate or appoint someone to prepare an independent one.
In an uncontested divorce, the spouses may agree on the value and division without much court involvement. This can simplify the process and reduce costs.
Regardless of the type of divorce, it’s important to have a clear, supported value backed by documentation.
Business division during divorce can have tax consequences. For example, buyout payments may affect each spouse’s taxes differently depending on how they’re structured.
Other tax issues include:
Depreciation recapture
Capital gains
Business deductions
Future income reporting
Working with a financial advisor can help each party understand what the division means long-term. These tax impacts are often overlooked in early negotiations but can influence the final outcome significantly.
Tennessee follows equitable distribution laws, meaning that property is divided fairly—not necessarily equally. When valuing and dividing a business, the court considers:
Contributions of each spouse to the business
The length of the marriage
Each spouse’s earning ability
The value of other marital assets
Judges aim for a division that supports both parties while recognizing each one’s role in the business and marriage.
Dividing a business requires accurate information, sound valuation, and an understanding of how Tennessee courts operate. For experienced legal representation, reach out to me, Theresa D. Childress, today. My firm, Attorney Theresa D. Childress, serves clients in Memphis, Tennessee, and throughout Shelby County, including Lenox, Nonconnah, Germantown, Bartlett, Arlington, and Millington.
Dividing property is often one of the most time-consuming parts of the divorce process. This is especially true when one or both spouses own a business. In Tennessee, particularly Memphis, courts look closely at how to handle business interests fairly.
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