This article is an introduction to valuating and dividing a business during divorce.
Certainly every divorce potentially involves significant asset division, but when one or both spouses are involved in a closely-held business, the stakes increase dramatically. Divorce can pose a severe and even existential threat to professional practices, small retailers and restaurants. A closely held business is usually both a source of income and a property asset for the couple, meaning it is divisible in divorce proceedings, absent a prenuptial agreement or buy/sell agreement that addresses divorce.
While dividing a business can - and has - left couples in difficult emotional and financial circumstances following divorce, this need not be the case. Below are a few options divorcing couples have when deciding how to manage business ownership during and after divorce. Which of these options is best depends on the goals and circumstances surrounding the divorce and the business itself.
Setting a goal for the business
If you own a business jointly, it helps early to establish an ideal outcome. Can one party to the divorce buy out the other's share in the business? Is now a good time to sell the business to a third party and split the proceeds? Is the divorce amicable enough that after separation both you and your spouse will be able to continue working together?
Before proceeding with the divorce, it is a good idea to establish each party's priorities. Negotiation and mediation can cut down on the time and cost of divorce. In order to be productive, however, negotiation requires an end goal that can satisfy both parties. Only you can decide if you will be able to keep the trust and working relationship with your ex-spouse required to keep the business. If starting over is a higher priority, it might make more sense to obtain assets in lieu of the business interest to help you in the next stage of your life.
Valuating the business
Of course, it is difficult to establish a goal for the business if one or both parties are unaware of the true value of the business. This generally means hiring a professional appraiser. If the divorce is contested, then each party will likely hire his or her own appraiser. The appraiser can use several methods to valuate a business, including:
- The market approach, which compares the business to similar business recently sold
- The income approach, which looks at the expected income the business will bring in
- The asset approach, which includes the physical assets of the business, including property and equipment
Whatever the method, the valuation is an integral part of the divorce. Because the business may be the largest asset you own, undervaluing or overvaluing the business can make for an inequitable division of assets. While each approach has its merits for particular circumstances, none is always the right approach in every circumstance.
Obtain an attorney who will protect your interests
As noted previously, dividing a business in divorce requires a tailored approach based on the particular circumstances of the parties involved. There is no one-size-fits-all approach to business division and divorce.
At Testa & Pagnanelli, LLC, our attorneys understand what is at stake when dividing a closely held business in divorce. Contact our team to discuss your legal options and goals to help determine the best approach for you.
Keywords: Divorce, business valuation, dividing a business, closely held businesses and divorce.