Key Points:

• There are two main questions. Is the business, or some part of it, marital property? And what is it worth? State law and timing answer the first. An appraiser and, ultimately, a judge answer the second.

• A business started during the marriage is community property in Louisiana and Texas and marital property nearly everywhere else, no matter whose name is on the paperwork. A business you owned before the marriage is usually yours, but the growth during the marriage, and the unpaid labor that produced it, often isn't.

• Value comes from three approaches (asset, market, income) and one big split: enterprise goodwill versus personal goodwill. Louisiana excludes personal goodwill by statute. Texas excludes it by case law. Massachusetts doesn't draw the line the same way.

• Massachusetts values a business as "fair value" between fiduciaries, with no marketability or key-person discounts when one spouse keeps the company. Louisiana values it as of the trial date. Texas looks hard at reimbursement for the owner's time and toil.

• The owner almost never loses the business. The fight is about the number and about how the other spouse gets paid: an offset against other assets, a buyout note, or, rarely, a sale.

Part One: Ownership and Value

By Richard Perque

I'm a family law attorney and former judge, and I've handled business valuation disputes from three seats: representing the owner, representing the spouse who isn't the owner, and deciding between two experts who were each certain the other was wrong. I'm licensed in Louisiana, Texas, and Massachusetts, and those three states manage to disagree on nearly every question this article raises, which makes them a useful tour of how the country handles it.

Question One: Whose Business Is It?

Owners assume the business is theirs because they built it. Non-owner spouses assume it's half theirs because they were married. Both are sometimes right.

In Louisiana, the Civil Code classifies property as community or separate. A business formed during the marriage with community funds or community effort is community property under article 2338, and article 2340 presumes everything acquired during the marriage is community until proven otherwise. It doesn't matter that the LLC is in one spouse's name alone, that only one spouse ever set foot in the office, or that the operating agreement says the other spouse has no interest. Louisiana looks at when and how the interest was acquired, not whose name is on it.

A business a spouse owned before the marriage, or received by inheritance or gift, is separate property under article 2341. But three things eat into that. First, the income the business throws off during the marriage is community, because Louisiana treats the fruits of separate property as community unless the owner files a declaration reserving them under article 2339. Second, if community money went into the business, the community is owed reimbursement. Third, and this is the one that surprises owners, article 2368 says that when separate property increases in value because of the uncompensated common labor or industry of the spouses, the other spouse is owed one-half of the increase attributable to that labor. If you built your separate company from a $200,000 business into a $2 million one while paying yourself below market, your spouse has a claim on that growth.

Texas runs on the same community-versus-separate architecture, with an "inception of title" rule: the character of an asset is fixed when it's acquired. A business started before the marriage stays separate. But Texas developed the reimbursement idea early, in Jensen v. Jensen in 1984, and later codified it in Family Code section 3.402: the community has a claim for inadequate compensation for the time, toil, talent, and effort a spouse put into a separate business beyond what was needed to preserve it. The Texas fight is often less about whether the business is separate and more about how much the community is owed for the years the owner underpaid themselves.

Massachusetts doesn't draw any of these lines. Chapter 208, section 34 lets the judge divide all property of either spouse, whenever and however acquired. A business you owned before the marriage or inherited during it is on the table. The judge weighs the length of the marriage, each spouse's contribution, including as a homemaker, and a list of other factors to decide what share the non-owner gets. In a short marriage, a premarital business may stay largely with the owner. In a 25-year marriage, it usually doesn't.

Most equitable distribution states fall somewhere between Massachusetts and the community property model: separate property stays separate, but appreciation during the marriage that's attributable to marital effort is divisible. Wherever you are, the questions are the same. When was the interest acquired? What went into it during the marriage? Was the owner paid a market salary, or did the family live on less so the business could grow?

Question Two: What Is It Worth?

Once you know what share is marital, somebody has to put a number on it. That job goes to an appraiser, and the fights start with the assumptions the appraiser makes.

Appraisers use three approaches. The asset approach adds up what the company owns, subtracts what it owes, and is mostly useful for holding companies and businesses that are worth their equipment and real estate. The market approach compares the business to sales of similar companies, which works when there's good comparable data and often doesn't for a small professional practice. The income approach, the one that drives most divorce valuations, projects the company's future earnings and discounts them to a present value, or capitalizes a normalized earnings figure.

That word "normalized" is where the arguments start. The appraiser adjusts the books to reflect what the business would earn under ordinary management: replacing the owner's salary with a market salary, stripping out the personal expenses run through the company, and adjusting one-time events. An owner who paid himself $400,000 for work a manager would do for $150,000 has understated the company's value. An owner who paid herself nothing has overstated it. Leslie covers what owners do to the books when a divorce is coming in Hidden Assets: How Spouses Hide Money, and How Discovery Finds It.

Then comes the biggest single variable: goodwill.

Personal Goodwill vs. Enterprise Goodwill

Goodwill is the value of a business beyond its hard assets. It's the reason a dental practice sells for more than its chairs and drills. The law splits it in two. Enterprise goodwill belongs to the business itself: the location, the brand, the systems, the workforce, the customer list, the fact that the phone rings whether or not the founder is in the building. Personal goodwill belongs to the individual: patients who'd follow the dentist across town, clients who hired the lawyer, not the firm.

Louisiana settled this by statute. R.S. 9:2801.2 says a court may include goodwill in valuing a community-owned business, but that portion attributable to any personal quality of the spouse awarded the business shall not be included. So the value of a Louisiana professional practice, for divorce purposes, is often a fraction of what the practice would sell for on the open market, because the buyer would be paying for the professional's reputation and the divorce court can't count it. The line isn't always where owners think, though. In one Louisiana case, a husband who ran a one-person insurance adjusting business argued it was all personal goodwill. His wife's expert showed the business produced profits well beyond what the market would pay for his individual services, and the court of appeal upheld a $253,000 valuation as community property.

Texas reached the same place by case law. In Nail v. Nail in 1972, the Texas Supreme Court held that goodwill attached to a professional's person is not divisible property, and later cases confirmed that goodwill belonging to the business apart from the person is. Texas experts spend a lot of energy allocating between the two.

Massachusetts is different. Section 34 doesn't exclude anything, and Massachusetts courts have treated goodwill, including a professional's goodwill, as a component of value the judge can consider in the overall division. Whether and how much personal goodwill counts becomes a matter of the judge's discretion under the section 34 factors rather than a categorical exclusion.

Nationally, most states follow something like the Louisiana and Texas approach, excluding personal goodwill. A minority, including New Jersey and Washington, count it. If you're a professional in a divorce, this single question can change your exposure by hundreds of thousands of dollars, and it's the first thing I'd ask a lawyer in your state.

Discounts, Standards of Value, and the Bernier Problem

An appraiser valuing a minority interest in a private company will usually apply discounts: a marketability discount because the shares can't be sold easily, and a minority or lack-of-control discount because a 30 percent owner can't run the company. Those discounts can cut a valuation by 30 to 50 percent, and whether they apply in a divorce is a state-by-state fight.

Massachusetts answered it in Bernier v. Bernier in 2007. A husband was keeping two supermarkets the couple owned equally. His expert applied a marketability discount and a "key man" discount to reflect his importance to the operation. The Supreme Judicial Court threw both out. When one spouse keeps the business and the other is divested of it, the court said, the parties aren't hypothetical buyers and sellers in an open market. They're fiduciaries entitled to an equitable share, and the standard is fair value, not fair market value. No sale is happening, so no discount for the difficulty of selling. Bernier also settled how to handle S corporation taxes, holding that neither ignoring taxes nor applying full corporate rates was right.

Louisiana's statute uses the words "fair market value," and Louisiana courts have applied discounts in some cases and rejected them in others depending on the facts. Texas generally follows fair market value but treats discounts as a question for the factfinder. If you're the spouse being bought out, the standard of value matters more than which expert has the fancier report.

Two more issues come up in every case. Valuation date: Louisiana's R.S. 9:2801 requires the court to value assets as of the time of trial on the merits, which can be years after the filing, so an owner who grows the business after separation may be sharing that growth, and one who lets it decline may be answering for it. Texas values as close to the divorce as practicable. Massachusetts leaves the date to the judge's discretion, and judges have used the trial date, the separation date, or something in between depending on who did what after the couple split.

And double dipping: if the income approach values the business by capitalizing the owner's excess earnings, and the court then orders spousal support based on those same earnings, the non-owner spouse has been paid twice from the same dollars. Massachusetts courts have policed this since Champion v. Champion in 2002. Louisiana and Texas courts recognize the problem but handle it case by case. Your lawyer should raise it in every case where there's both a business and a support claim.

How the Non-Owner Spouse Gets Paid

Almost no judge orders a business sold, and almost no judge makes divorcing spouses co-owners. The owner keeps the company and the other spouse gets value. That happens in one of three ways.

The most common is an offset. The owner keeps the business, the other spouse gets a larger share of the house, the retirement accounts, and the brokerage account. This works when the estate has enough other assets to balance.

When it doesn't, the owner pays an equalizing amount over time, secured by something. In Louisiana that's usually a promissory note secured by a mortgage or pledge. In Texas it's often an owelty lien on real estate. In Massachusetts it's a judgment with a payment schedule. Interest, security, and what happens on default should all be in writing.

A forced sale is the last resort, and it's a bad one, because a divorce-driven sale sells at a discount and both spouses lose.

One thing that makes all of this easier: transfers of property between spouses incident to divorce aren't taxable events under section 1041 of the Internal Revenue Code. But the basis carries over, so the spouse who takes the business also takes the built-in tax bill. A $1 million business with a $100,000 basis isn't worth the same as $1 million in cash, and a fair division accounts for that.

Part Two: Louisiana in Practice

By Leslie Bonin

The Descriptive List Is Where It Starts

Under R.S. 9:2801, each spouse files a sworn detailed descriptive list of community assets and liabilities within 45 days of a motion to partition, with a fair market value for each. The business goes on that list with a number next to it. The other spouse has 60 days to traverse.

Two mistakes happen here constantly. The owner puts down a number pulled from the air, or the book value, or a figure their CPA gave them for a loan two years ago. And the non-owner spouse either accepts it or traverses without having anything to back up a different number. Neither of you should put a value on that list without talking to a valuation professional, even informally. Once you've sworn to a number, you're going to hear about it at trial.

Getting the Records

If you're the non-owner spouse, the business records are the case. I request the general ledger in electronic form, QuickBooks or equivalent files, five years of business tax returns with all schedules, bank and credit card statements for every business account, payroll records, accounts receivable and payable aging reports, contracts and leases, the operating or shareholder agreement, and any buy-sell agreement or prior valuation done for a loan, a partner buyout, or estate planning. That last category is gold. A business owner who told a bank the company was worth $3 million doesn't get to tell a judge it's worth $800,000.

If the owner resists, discovery has teeth. Louisiana courts can compel production, award fees, and, when a spouse stonewalls, treat the facts as established against them.

The Owner's Duties Don't End at Filing

This is the part Louisiana owners get wrong. The community ends retroactively to the filing date, but the business is still former community property until it's partitioned, and under Civil Code article 2369.3 the spouse who controls it owes a duty to preserve and prudently manage it. The owner can't sell it, encumber it, or bring in a new partner without the other spouse's concurrence under article 2369.4. And because R.S. 9:2801 values the business at trial, an owner who runs it into the ground after filing is likely to answer for that.

If you're the owner, the practical advice is simple. Keep paying yourself what you always paid yourself. Keep the books the way they've always been kept. Don't launch a new entity, don't shift clients to a friend's company, and don't make unusual distributions or unusual capital purchases. Every one of those moves is discoverable, and every one of them looks like exactly what it is.

Who Gets the Business

Louisiana courts allocate assets under R.S. 9:2801(A)(4). The judge is supposed to consider the nature and source of each asset, the economic condition of each spouse, and any other relevant circumstances, and to divide the community so that each spouse receives property of equal net value. The business almost always goes to the spouse who runs it. Nobody benefits from handing a dental practice to the spouse who isn't a dentist.

What's negotiable is everything else. An equalizing payment can be structured over time, secured by a mortgage on real estate or a pledge of the business interest itself. The non-owner spouse can take the house and the retirement accounts in exchange. Or, if there's a matrimonial agreement, the whole question may already be answered. Louisiana lets couples opt out of the community regime by a matrimonial agreement under Civil Code article 2329, before the marriage without court involvement or during it with court approval. If you're a business owner reading this before you get married, that article is worth a conversation. See Prenups and Postnups: What They Can and Can't Do.

Choosing the Expert

Get someone with a valuation credential: ABV (Accredited in Business Valuation, from the AICPA), ASA (Accredited Senior Appraiser), or CVA (Certified Valuation Analyst). Ask how many divorce valuations they've done and how many times they've testified. Ask whether they've been excluded by a court, and check.

Then decide whether you want one expert or two. A jointly retained neutral appraiser costs half as much and produces a number both sides find hard to argue with, which is exactly why one side often refuses. Dueling experts cost more, and the judge splits the difference more often than either side likes to admit. For a business under a couple million dollars, a neutral is usually the smarter money. For a bigger or more complicated company, or one where the owner has already been caught adjusting the books, you want your own.

Either way, budget for it. A valuation runs from a few thousand dollars for a simple practice to well into five figures for a company with real estate, multiple entities, or a partner buyout in the history. Compare that to the range of outcomes and it's usually the best money spent in the case.

What This Looks Like When It Goes Well

The cases that resolve cleanly share a pattern. The owner produces the records early and completely. Both spouses agree on a neutral appraiser, or at least agree on what each side's expert will be given. The valuation separates the goodwill that belongs to the company from the goodwill that belongs to the person, without pretending either is zero. The parties structure a buyout the business can actually afford, secured, with a schedule. And nobody tries to hide anything, because in a business case, the records always tell.

This article is for general informational purposes only and is not legal, tax, or valuation advice. Property classification and valuation rules vary significantly by state, and the Louisiana, Texas, and Massachusetts provisions discussed here won't apply the same way elsewhere. Talk to an attorney licensed where your case is pending, and involve a credentialed valuation professional early.

Frequently Asked Questions

Is my business community property in a divorce? In Louisiana and Texas, a business started during the marriage is presumed community property regardless of whose name is on it. A business owned before the marriage or inherited is separate, but the community usually has a reimbursement claim for money it contributed and for the owner's uncompensated labor that increased its value. In Massachusetts, all property is divisible regardless of when it was acquired, and the judge decides the share based on the length of the marriage and each spouse's contributions.

How is a business valued in a divorce? A credentialed appraiser uses one or more of three approaches: the asset approach (net assets), the market approach (comparable sales), and the income approach (projected or capitalized earnings). The appraiser normalizes the financials to reflect a market salary for the owner and remove personal expenses, then addresses goodwill, discounts, and the valuation date under the rules of your state.

What is the difference between personal goodwill and enterprise goodwill? Enterprise goodwill belongs to the business: its brand, location, systems, staff, and customer relationships that would survive the owner leaving. Personal goodwill belongs to the individual: clients or patients who would follow that person. Louisiana excludes personal goodwill from a divorce valuation by statute (R.S. 9:2801.2), Texas excludes it by case law, and Massachusetts allows the judge to consider it. The distinction can shift a professional practice's divorce value by hundreds of thousands of dollars.

Will I have to sell my business or give my spouse half of it? Almost never. Courts award the business to the spouse who runs it and give the other spouse value through an offset against other assets or an equalizing payment over time, usually secured. Forced sales and continued co-ownership are rare because they hurt both spouses.

What is the Bernier standard in Massachusetts? In Bernier v. Bernier (2007), the Supreme Judicial Court held that when one spouse keeps a closely held business and the other is divested of it, the business is valued at fair value between fiduciaries, not fair market value. Marketability and key-person discounts don't apply because no sale is happening, and S corporation earnings must be tax-affected in a way that reflects the actual benefit to the spouse who keeps the company.

Can my spouse claim part of the business I owned before we married? Usually not the business itself, in a community property state. But in Louisiana, Civil Code article 2368 gives the other spouse one-half of the increase in value attributable to uncompensated labor during the marriage, and Texas Family Code section 3.402 gives the community a reimbursement claim for the owner's underpaid time and effort. In Massachusetts, a premarital business can be divided outright, with the share depending on the marriage's length and each spouse's contribution.

Related Reading

Hidden Assets: How Spouses Hide Money, and How Discovery Finds It | Intellectual Property and Community Property: Who Owns the Book, the Patent, and the Brand | Prenups and Postnups: What They Can and Can't Do | What a Certified Divorce Financial Analyst Actually Does | The Essential Guide to QDROs in Divorce | Are They Really Settling, or Is This Another Stall Tactic? | What the Judge Is Actually Thinking | Art, Antiques, and Collectibles in Divorce