Dividing assets during divorce can be complicated, but it becomes even more so when a business is one of the assets to divide. If you and your spouse own a family business, you need to know what goes into dividing that business fairly. No matter how big or small the business is, the first step is always to find an attorney who has experience in navigating a high asset divorce like yours with a family business on the line.
Even if the business is primarily owned by one spouse, in most cases, the business will be considered a joint asset and will need to be divided equitably. However, when the business was owned by one spouse prior to marriage and was not relied on financially during the marriage, or the business is considered one spouse’s inheritance, it may not be considered a joint asset. If the ownership is at all in question, it is important to work with an attorney right away to make sure that the business is treated appropriately during the process.
The first step when dividing a family-owned business in divorce is to determine the value. There are three approaches to business valuation, and your divorce attorney can help guide you toward the best method for your situation.
In an income approach to valuation, the company’s past performance will be used to determine future earnings. The future income will then be used to calculate the current value. If your business is stable and generates steady earnings with stable growth, this can be the best method of valuation. This method can be complicated and will require an expert to calculate, but if the business will need to be sold or one spouse will buy out the other, it is considered the most fair and accurate valuation.
This valuation method is much like a real estate appraisal. The business will be analyzed and compared to similar businesses in the area that have recently been sold, which will determine its market value. If the business owned is a franchise, this is the typical method because it is easy to make an accurate comparison. This method isn’t always the most accurate for unique businesses.
The asset approach looks not only at the fair market value of the business, but also the liabilities. If a business has insufficient income or cash flow, or doesn’t have a good comparison to other businesses, this approach can be the best option. If the business has a large inventory of assets, but does not show a large profit, this can be a good way to determine value.
In some cases, both spouses will agree to have one business valuation done together, but in other cases, each spouse will have their own valuation done. In these cases, there may be disputes about how the business is valued. In these cases, a judge may need to look at the methods used and make the final determination of the Fair Market Value.
Every case is different. Many divorcing business owners want assurance that their business can survive a divorce. While it is certainly possible for a family business to remain intact, even in the case of divorce, in certain cases the business will need to be divided or sold. In the case where the business needs to be liquidated, there are more implications than a simple asset division. The employees may be affected, there may be significant tax concerns, and the future of the business can be in jeopardy. The most common scenarios are:
In most cases, this is the best scenario, especially when one spouse has a larger role in the day-to-day operations of the business. One spouse will buy the other out based on the valuation of the business and continue the business as sole owner. This works well if the spouses no longer wish to work together, but may have tax implications for both partners.
In this case, the business will remain intact, but neither spouse will have an ownership interest and the profits from the sale will be divided equitably. The difficulty with this situation can be finding the right buyer.
This agreement will keep the business. For this to work, the spouses must be able to work together. The spouses will work together as partners and co-owners, with a new business agreement drawn up to protect everyone involved.
Your attorney will not perform the business valuation, but they do need to have a strong understanding of the process. Your attorney can help you determine the best way to proceed, and then recommend the right experts for the business valuation process and steps to move forward. If spousal or child support will be a concern during the divorce process, your attorney will also understand how to best protect you, your children, and your business when calculating your income and responsibilities. When you are looking for a divorce attorney and have a family business with your spouse, it is important to make sure the attorney you choose has the right experience with business owners.
If you are a business owner going through a divorce, you want to have an experienced, local divorce attorney guiding you. They can help you find the right professionals to help you make the best decisions moving forward that will protect both you and your business. If you’re going through a high asset divorce and need experienced, legal representation, contact my office today.