Divorce and Business: 4 Key Questions
According to a study conducted in 2011, 90% of small businesses in the US are considered family owned and in a separate study, researchers estimate that 50% of marriages end in divorce, with both these figures in mind, it is important to ask the question, what will happen to the family business in the event of a divorce?
The sadness, stress and insecurity that accompany the breakdown of a marriage can take on another level when it could impact, not only your personal life but your professional life also.
As an entrepreneur or the owner of a family business it is vital, in the event of a divorce, that you are aware of how this could impact your business.
Important questions to ask:
Is the Business an asset of the Marriage?
Is my Spouse entitled to half of my Business?
How is a business valued on divorce?
Will the court force sale of my business?
Divorce laws vary from state to state, so it is imperative that you consult a divorce attorney in your state, who will be familiar with laws and how this could impact you.
Is the business an asset of the marriage?
In the event of a divorce the marital assets are divided between both parties involved. If, during the time of the marriage, the value of the business grew, the amount of increase will usually be included in the marital assets and have to be divided between the parties.
It is also important to note that not only the value of the business but the value of any property purchased for the business during the marriage i.e. Shop premises, offices etc., are also considered a marital asset and will be considered part of the marital asset pot.
It is important to note that it is irrelevant who purchased the property or whose name the property or business is registered under, if it is registered under one parties name or both parties name, it is still considered an asset and will be treated as one during a divorce settlement.
Is my spouse entitled to half of my business?
Across the US there are two types of state, a Community Property State and an Equitable Distribution State.
In a Community Property State both parties are considered equal and the marital assets will be split evenly, 50:50, to each party. There are nine Community Property States – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
The 41 states that fall under Equitable Distribution status will not divide the assets 50:50, but they will take several factors into account and divide the marital assets fairly, but this might not mean evenly. There are a number of factors that are taken into account, including financial situation coming into the marriage and upon exiting the marriage.
How is a business valued during divorce?
Each business is complex, consisting not only of tangible assets like buildings, bank accounts, inventory, tools, fixtures, furniture and machinery; but also, intangible assets such as mortgages, leases, patents, trademarks, unlisted stock, skilled labour, accounts receivable and most notably, goodwill.
Businesses are usually valued in two ways, book value or fair market value. Traditionally, a company’s book value is its total assets minus intangible assets and liabilities, whereas fair market value includes ‘good will’. Good will refers to the future earnings and growth which will not appear as an intangible asset on the balance sheet. Some would argue that good will is the actual value of a business as it refers directly to a company’s brand reputation, customer base and potential for future earnings.
For example, a software company with a book value of $1 million may be worth $10 million according to fair market value. This may be because the company is in a stage of growth with a great brand reputation and loyal customers.
Unfortunately for business owners, most divorce courts will divide property on the basis of the fair market value of the assets.
Will the court force sale of my business?
A business is often the most valuable asset in a marriage breakdown, there is often no other way for the assets to be paid and as a result businesses are often sold in the event of a divorce.
Although the court will investigate potential other avenues that could provide your spouse with their percentage of the marital assets, if there is no other way for the assets to be provided, the court will enforce the sale of the business.
Specialist advice – The state divide
Divorce laws vary from state to state and it’s important to get the advice of a divorce attorney in your state to determine where you stand, what you’re entitled too and what your options are. It’s also important to understand that the vast majority of divorces end in a negotiated settlement and very few divorces proceed all the way through to trail, so hiring an experienced attorney who can negotiate a favorable settlement will undoubtedly save time and get the whole process over as soon as possible.
Alternatives to divorce
Many people are unaware of the alternatives to drawn out divorce proceedings. Mediation is becoming popular as an option to prevent a messy and hurtful divorce. Mediation is often a more amicable option and can help both parties negotiate a fair and agreeable solution. There are many benefits to mediation but particularly in a situation where family business is involved, divorce proceedings may insist on the sale of the business, whereas mediation could be the solution to preventing this from happening.