Breaking up (a business) is hard to do.
The number of small and closely-held businesses has increased over the
years-and so has the number of business assets in need of allocation or
division in divorce proceedings. This can make a divorce much more complex.
There are three scenarios that can typically occur when dividing a business
in a divorce:
- Most often: The business is awarded to the spouse with the greater involvement
and the other spouse is compensated.
- Sometimes: The court can order the business to be sold and the proceeds divided.
- Rarely: The business continues to be jointly operated by both parties.
Valuation and Compensation for Business Assets in a Divorce
In most cases, one spouse is substantially more involved in the business
operations than the other spouse. In such cases, the court is most likely
to award the business to the spouse who has the greater involvement.
Because it is most likely for a court to award the business to one spouse,
the resulting issue in such cases is how to compensate the other spouse
for his or her share of the business. In order to do this, the court will
need to determine the value of the business interest that is being awarded
to one spouse.
Because most marital businesses are small and/or closely-held, business
valuation is frequently a complex issue. Most are not publicly traded
on a public stock exchange (where the value of the shareholder interest
can be readily ascertained). This means a closely-held business will need
to be valued by a competent financial expert who is familiar with valuations
in divorce situations. Experts who are experienced in divorce valuations
usually provide a more accurate picture by excluding discounts that are
not appropriate for divorce situations. Typically the financial expert
is a Certified Public Accountant (CPA) with an Accredited in Business
Valuation (ABV) designation.
The valuation process can be lengthy and costly in addition to being complex.
It is important to work closely with divorce lawyers who are experienced
in this area. It may be that a business has not generated sufficient income
and/or does not have sufficient assets to warrant investing substantial
funds in an expert valuation. An experienced attorney will be able to
assist in making such a determination (it also never hurts to seek an
initial opinion from a business valuation expert).
For an expert to ascertain the value of a business, he or she will need
to review a variety of records to determine the business's income,
expenses, assets and liabilities. The expected future income from a business
represents a component of the business value, so even if the business
has no other hard assets, the income alone may result in a significant
If there are insufficient assets to fully compensate the spouse for his
or her marital share of the business up front (which might be the case
in situations where the business is the largest marital asset), the court
may award the spouse a lien against future business income to ensure the
spouse receives appropriate compensation.
Sharing Business Assets in a Divorce
In cases where the spouses have substantially equal involvement in the
business operations, the court may still decide to award the business
to one spouse or have the spouses continue to jointly own and operate
In order for the court to determine that ongoing joint ownership and operation
of a marital business is a good idea, both parties have to demonstrate
that their involvement is important to the business and that they will
be able to continue to work together as business partners even though
they will no longer be married. This is extremely rare. In fact, if one
spouse has to go to court to ask for shared ownership post-dissolution
(over the other spouse's objection) the request will almost certainly
Selling the Business
The court can also decide to order the business sold, and may be inclined
to make such an order if: a) neither spouse wants the business, or b)
one or both spouses want the business but there are insufficient assets
and income to fairly compensate the spouse who would have to leave the
business. The court typically would not favor a forced sale of a viable
business operation; it would order a forced sale in limited situations.
However, if spouses have the type of business relationship that will survive
divorce, they will likely be able to resolve the property issues outside
of court through mediation or other means.
Hidden Business Income or Assets
In situations where a spouse is taking steps to hide income/assets or make
the business appear to be less valuable than it actually is, it may be
important to audit certain records in greater detail. Although this can
be costly, specific audits may reveal important information:
- Comparing historical records to more current records may reveal a departure
from historical practice with respect to certain expenses. Perhaps a spouse
is attempting to run additional personal expenses through the business
in an effort to reduce business profits. Or perhaps a spouse has elected
to make unnecessary capital expenditures in an effort to reduce apparent profits.
- Auditing personal records may also provide insight into the actual business
income. A review of the business records alone may not reveal whether
issues such as running a number of personal expenses through a business
have occurred. However, a review of personal records would reveal the
absence of certain expected personal expenditures and may warrant an adjustment
to the stated business income.
- When valuing a cash business, reviewing personal financial records can
be extremely important. The marital expenditures may substantially exceed
what has been reported as business income-meaning that certain cash payments
were never reported.
- Loan applications completed by the involved spouse either for business
or personal loans might also provide information helpful to a business
valuator. This is especially true if the involved spouse is takes the
position that the business has no value or declining income.
Securing an accurate business valuation is important-especially when one
spouse is relying on the valuation to receive an equitable distribution
of other property to compensate for the business being awarded to the
other spouse. Once the value of the business is determined, the spouse
who is not being awarded the business will be awarded a greater share
of other assets in order to compensate for his or her marital share of
For more information, contact a McKinley Irvin divorce lawyer, or read
more about the division of assets in a divorce.