Valuing Law Firms in Divorce

Divorces involving professional businesses present unique challenges, and valuing law firms in divorce is no exception. Law firms, by their nature, are deeply tied to the skills, reputation, and relationships of their attorneys, making valuation a nuanced and often contentious process. If you or your spouse have ownership interests in a law firm and you intend to end your marriage, it is important to talk to an attorney about your options for safeguarding your financial future. At McClure Law Group, our experienced Dallas divorce attorneys are adept at assisting clients in valuing law firms in divorce, and if you hire us, we will work diligently to protect your financial interests throughout the division of marital assets.

Under Texas law, property acquired during a marriage is presumed to be community property, as stated in the Texas Family Code (the Code). This presumption includes any business interests, such as a law firm, that were created or increased in value during the marriage. The process of valuing law firms in divorce requires identifying their tangible and intangible components while addressing the unique aspects of a legal practice.

Unlike other businesses, much of a law firm’s value may derive from intangible elements, such as the firm’s reputation, client relationships, and goodwill. Goodwill is particularly significant in law firm valuations and can be categorized as either personal goodwill, tied to the individual attorney’s skills and reputation, or enterprise goodwill, which relates to the firm itself. In Texas, personal goodwill is excluded from community property and is not subject to division. This distinction makes it critical to separate the attorney’s personal contributions from the law firm’s value as an entity.

Valuing law firms in divorce also involves addressing the practice’s physical assets, such as office equipment, real estate, and accounts receivable. Additionally, liabilities, such as outstanding debts or lease obligations, must be factored into the valuation. Given the highly specialized nature of law firms, obtaining an accurate valuation often requires the input of financial and legal experts familiar with the unique challenges of this process.

The valuation of law firms is inherently complex because their worth is often tied to factors that are difficult to quantify. For example, while a law firm’s financial records, client lists, and profitability provide insight into its value, the firm’s future earnings potential may depend on the individual attorney’s continued involvement. This presents a challenge when one spouse is the practicing attorney and the other seeks a fair share of the business’s value without disrupting its operations.

Another unique challenge arises from ethical and regulatory considerations. Under Texas law, non-lawyers are prohibited from owning an interest in a law firm. This restriction can limit options for dividing ownership interests in a divorce. Instead, courts and attorneys must focus on finding alternative methods to allocate the firm’s value, such as offsetting it with other marital assets.

Once a law firm’s value is determined, the division of its interests must be approached with care. Given the restrictions on non-lawyer ownership, one spouse typically retains the law firm while the other receives compensation through alternative means. This compensation may involve offsetting the firm’s value with other community assets, such as real estate, retirement accounts, or investment portfolios.

In some cases, a spouse may argue that their non-financial contributions to the marriage, such as supporting the attorney’s career or raising children, entitle them to a larger share of other assets. Courts often consider these factors when determining how to divide marital property. Additionally, if the law firm was established before the marriage, its classification as separate or community property may depend on whether its value increased during the marriage due to community efforts or investments.

Valuing law firms in divorce can be challenging from both a legal and financial perspective, and often requires input from numerous experts. If you or your spouse own a law firm and are facing divorce, it is advisable to consult an attorney to determine what measures you can take to protect your interests. At McClure Law Group, our skilled Dallas divorce attorneys take pride in helping clients tackle contentious disputes, and if you engage our services, we will craft compelling arguments designed to help you seek your desired outcome. Our main office is in Dallas, and we also meet with clients by appointment at our Collin County office in Plano. We proudly serve individuals in divorce cases throughout Dallas, Fort Worth, Rockwall, Frisco, McKinney, Irving, Richardson, and Garland, as well as cities across Dallas, Denton, Collin, Rockwall, Tarrant, and Grayson Counties. Call us at 214.692.8200 or complete our online form to schedule a confidential consultation today.