Going through a divorce as a business owner can get messy. If your future ex-spouse co-owns the business, it’s likely one of you wants out. This can create costly exit events and potential stalemates over value, buyouts, equity and division of assets after the divorce is complete.
If your future ex isn’t an active owner, they may worry they’ll be taken advantage of during the divorce property settlement. This could lead to them aggressively asking for more than they’re entitled to. Regardless of the circumstances, you can almost guarantee that a business valuation will be needed as part of the divorce decree and settlement to ensure that divorce asset distribution is fair to everyone involved.
Who conducts the business appraisal is critical to mitigating financial risks, unnecessary stress and years of pressure on both you and your business. You have several options at your disposal, each with varying degrees of risk and expense:
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Calculate the company’s value yourself – this approach creates risk for both spouses and is usually a bad idea. Even if both spouses agree with this approach, you may incorrectly value the company. This can expose both parties to unbalanced splits of business assets. By far, this is both the cheapest and riskiest approach. You get what you pay for.
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Hire a forensic accountant to conduct a business valuation on behalf of both parties. This means using an expert that both spouses agree to that will bring pricing accuracy and objectivity. While this is a viable path, it still creates risk if either party disagrees with the valuation findings and decides to hire another forensic appraiser. Ideally this can be avoided through ongoing communication with your lawyers and spouse on expectations.
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Each spouse hires a forensic accountant to represent their interests in the divorce proceedings. This is a viable path for many and may be the least costly to all parties financially, mentally and emotionally. This approach allows two independent experts to assess the performance of the business, its tangible and intangible value and determine what a fair market value is. Once both accountants complete their valuation, spouses and their attorneys review the findings and negotiate an agreeable value. If this isn’t viable, the spouses cede the decision to the court. There, expert testimony may be needed so that a thorough analysis of both appraisals can inform the court’s final ruling.
Below are the most common questions we hear from business owners navigating a divorce:
Are Business Assets Marital Property?
Like many areas of divorce law, the answer to this question is nuanced and varies by state. Generally, determining whether a business is considered marital property or separate property is based on when the business was established, what funds were used to start and grow the business and whether a prenuptial or postnuptial agreement specified the ownership terms for the business. If the business was started or acquired prior to the marriage or was funded using one spouse’s separate funds, it is likely that courts will consider it a separate asset. In that case, the business won’t be divided as part of the divorce proceedings. Businesses started or acquired after the marriage using joint funds are usually considered marital property and included in the division of assets. Other considerations that could impact whether a business is deemed a marital asset include whether a spouse was given a share of the business during the marriage and whether joint funds were used to improve company assets and value during the marriage. In those instances, the business may be viewed as having some marital assets and some separate assets.
How Are Business Assets Divided in a Divorce?
If a business is deemed a marital asset with both spouses having an interest in the business, its value will be included in the divorce proceedings. The next factor in determining how the business will be divided is based on location and whether the divorce is in a community property state or an equitable distribution state. In community property states, marital assets are typically divided equally. In equitable distribution states, marital assets are typically divided equitably (though not necessarily equally). In all cases where the business will be included in the divorce, a certified business valuation is performed to determine what the business is worth. At that point, it is common to negotiate exactly how assets will be split. Common approaches include selling the business and dividing proceeds, one spouse buying the other’s ownership interest and taking over the entity and maintaining co-ownership of the business post-divorce.
How to Protect Business Assets in a Divorce?
Divorces can be contentious when it comes to division of assets. Businesses can be the most valuable assets in a marriage and protecting each spouse’s financial interest is often of utmost concern. While no marriage starts with plans for a future divorce, division of assets is easiest when prenuptial agreements are in place. In these cases, ownership is protected by the details in a legally binding contract. If a prenuptial agreement isn’t in place, it is wise to get legal advice from a family law attorney when it becomes clear that divorce is inevitable. Absent a prenup, you may be advised to seek protection via a post-nuptial agreement that spells out ownership terms. You may also be able to put your company in a trust to protect its assets or to change the company’s legal structure. None of those options are advisable, however, before getting guidance from an attorney. Hiding assets to protect your own interests is strongly discouraged as it is both illegal and immoral and can be punished by fines or criminal prosecution.
At Fair Market Valuations, our business valuation partners are experienced in a wide range of appraisal assignments across industry, geography and owner needs. The experience of going through a separation and divorce is stressful with considerable amounts of fear, uncertainty and doubts. Our experts are seasoned in determining business value in support of marital disputes and divorce matters, helping couples navigate toward a fair and equitable outcome for all concerned.
For more insights on the role of business valuation in a pending divorce, here are some useful resources:
Appraising The Value Of A Small Business In A Divorce