How Does Owning A Business Complicate Division Of Assets In A Divorce?
Owning a business complicates division of assets and debts in a divorce. Even more so, it can make determining income or expenses complicated. When a party owns a business, that party can sometimes hide what they are actually receiving in income by running it through the business. Running income through a business makes it difficult to determine the actual amount of earnings. Some business owners dump more assets and investment into their business than is necessary, to make it appear that they don’t receive much actual income from the business. However, there is a silver lining. If one party owns a business, sometimes that allows for creative settlement approaches that may not be present without business ownership.
Paying for personal expenses as business costs, and passing off business costs as marital expenses, can also be a complicating factor. Sometimes the business owner will do this in an attempt to make it seem that their spouse should pay for part of the business expenses. There are lots of ways that business owners can play with the numbers to make it seem like they are poor, or that the business is not doing well. For example, business owners will undervalue the business, so their spouse receives little value when it’s divided, or so they will have to pay less alimony and child support. These are some of the issues attorneys attempt to resolve when divorcing a couple who has a business.
How Is The Value Of A Business Or Businesses Determined When Two People Are Divorcing?
The valuation of a business can become complicated when two people are divorcing, but there are two basic methods. One is an asset-based approach, which simply totals up the actual hard assets owned by the business and valuating each asset, then reducing the total value of the assets by the total amount of debt of the business. That asset-based approach works better for businesses where the actual product is being sold. However, with service-based businesses, or tech-businesses, it’s more difficult to value the business that way. Asset-based valuation does not take into account what is known as “goodwill” and “blue sky”. Goodwill would be the reputation that the business is built, and that results in a recurring customer base. Blue sky is the potential that the business has to grow and become more valuable. Small businesses are often easier to value. Mid-size or larger businesses become much more complicated to value, and almost always requires the involvement of a “forensic accountant.”
Very often, each party will hire their own forensic accountant to pour over the business records and render an expert opinion on the business’ values. If the case goes to trial, both experts are put on the stand. The judge listens to the both of them, and makes a determination of the business’ value. Sometimes parties will agree in advance to use a single neutral expert. The single expert is someone that they both pay for valuating the business, and agree in advance, to the value determined by the forensic accountant. Hiring a neutral expert can save a lot of money and aggravation. But, it can also be a risk for the party who is disappointed in the forensic accountant’s opinion.
If The Business Has Stock Or Shares I, How Will That Be Divided In A Divorce?
If the business has stock or shares, the way it is divided in a divorce will largely depend on whether the stock or shares are publicly traded or privately held by the business. Shares or stock in a company that is publicly traded are regularly valued by the market, and those stocks can be publicly traded and sold just like any other asset. However, privately held stocks or shares in a company that has not “gone public” are much more difficult both to value and to divide. Privately held shares can only be valued essentially by valuing the entire business, which brings into play all of the previous difficulties referenced above.
However, if the business is sold, then the value of the shares or the stock will be determined by the sale of the business itself. This is because the party purchasing the business and the party selling the business will have agreed upon a value. From there, it is relatively easy to determine the value of the specific shares or stock in the privately held company. Most of the time, aside from the sale of the business, one generally must use the services of forensic accountants to determine the values of the shares or stock.
What Happens If One Party Owned A Business Before The Marriage?
If one party owned a business before the marriage, the outcome of division will depend on a couple of factors. If a business is pre-marital and has not increased in value, typically, that pre-marital business will be awarded to the party that brought it into the marriage. However, if the business has increased in value, the spouse may be entitled to one half of the increase. Also, if during the marriage, the parties co-mingled their efforts and resources with both of them contributing significantly to the business, especially financially, the court could determine that the business has been co-mingled to such a significant degree that the business has gone from being a pre-marital asset to a marital asset. In this type of scenario, the judge is unable to easily distinguish the pre-marital portion from the marital portion of the increase that resulted from the parties’ joint efforts and financial contributions. To sum up, a business is no different from any other property in this way. “Comingling” can change a pre-marital asset into a marital asset.
If it was pre-marital, it goes to the party who owned it before the marriage, except that any increase in value could generally be divided between the parties in some circumstances. If the business was co-mingled, to the point that it loses its separate character, the entire business could be considered a marital asset.