What to Know About Divorce and Business Valuation Issues
Owning a business is hard. Getting a divorce is hard. Combine the two and you have the potential for a nightmare scenario.
Luckily, the worst nightmares can be avoided with the proper legal assistance.
At Leap Frog Divorce, we’ve seen firsthand how divorce affects the day-to-day lives of business owners just like you. And after more than a decade in family law, we’ve learned how to prepare for (and often avoid) the biggest obstacles and pitfalls to successful divorce.
If you’re concerned about how your divorce is going to affect your business, you’ve come to the right place. Here are some of the most common questions people ask about business valuation and divorce.
If My Husband/Wife Owns a Business, Do I Own It Too?
Many people think that because they started a business and they worked hard to build it, that the business is all theirs. Florida law does not agree.
When you get a divorce in Florida, all of your marital properties, assets, and liabilities must be identified, categorized, valued, and fairly divided between you and your spouse. Any asset acquired during the marriage is considered “marital property,” including businesses.
If the business was started prior to the marriage, a portion of its value will be considered separate, nonmarital property but the remaining portion may be considered marital. If the value of your business was enhanced during the marriage through your efforts working on the business, then the enhancement in value will probably be considered marital property.
As marital property, the value of the business must be fairly divided between you and your spouse. And if you have other owners or partners, this can get more complicated.
How Is a Business Valued In a Divorce?
Before you can know how much of your business you and your spouse are entitled to, you have to know its value.
There are several different methods for valuing a business in a divorce:
- Income-based approach
- Asset-based approach
- Market-based approach
The income-based approach values a business based upon the company’s past, current, and projected future earnings.
The asset-based approach values a business based upon the value of a business’ assets (less any business liabilities).
The market-based approach determines the value of a business by comparing it with other similar businesses sold in a free market economy. A business valuation expert will examine recent sales of similar companies. This approach can be tricky if a business is too unique to have any comparable sales.
Goodwill is another important concept when it comes to business valuation. There is not enough room here to give a thorough and proper treatment of goodwill. It is enough on this page to simply state that if the value of a business is linked to one person in particular—usually the owner—then the value of the business may be next to nothing without that person.
Do I Need a Business Valuation Expert?
Yes. In fact, it is almost impossible to get an accurate business valuation for your divorce without an expert.
In a typical, traditional divorce, business valuation experts provide evidence and testimony regarding the value of the business. Because each spouse hires their own expert, a court hearing or trial becomes a battle of the experts!
Interestingly, our court judges cannot take each expert’s valuation for the business and split them down the middle. They are required to pick one expert over the other.
When I have a divorce case that involves a business, I almost always hire an expert who understands divorce and business valuation. A good expert on your side can make the difference between an award to your spouse of $0.00 versus millions. So I highly recommend budgeting for and utilizing the help of an experienced business valuation divorce expert.
How Is an LLC Treated In a Divorce?
Unlike sole proprietorships and partnerships, the assets of an LLC (Limited Liability Company) are treated as separate entities from the owner. In other words, your LLC owns the building, not you. Many business owners are under the mistaken impression that LLCs are “divorce proof,” but this is simply not the case.
Even if you started the business before your marriage, your LLC could still be considered as marital property. The judge in your case will look at a number of factors, including:
- When the LLC was created;
- How much your spouse contributed to the LLC;
- Whether you invested any marital assets into the LLC.
For example, even if you started the business prior to your marriage and invested no marital assets (i.e. money) into it, your business can still be considered marital property if your spouse worked as the office manager.
If you or your spouse owns an LLC or a corporation and you want the assets of the business distributed during your divorce, it will be important to name the business entity as a party to your divorce. Note that you are not required to do this and there are many occasions when it might be in your best interests to leave the LLC alone. For instance, if you live in a home owned by the LLC and the judge in your case decides that the assets contained in the LLC should be divided between you, you might be forced to sell the home.
To name an LLC as a party to your divorce just include it on the initial Petition for Dissolution of Divorce. However, even if you choose not to include it, your spouse may choose to do so in their counter-petition. Many people (and lawyers) overlook this important step. A court judge will be unable to distribute the assets of a corporation or LLC unless the business entity itself is a named party in your divorce.
How Divorce Affects Your Business
If your business is categorized as a marital asset, it will be valued and distributed like any other asset. In other words, it will be valued and the value will be equitably distributed between you and your spouse.
One option is to “buy out” your spouse’s interest in the business. If you don’t have enough cash to do this, you can issue them stock. However, if that stock has voting rights, you may find yourself in the difficult position of running the business with your former spouse.
Our court judges do not make it a habit of forcing former spouses to work together in a business. So, generally, one spouse will be awarded the business and the other spouse will be awarded 50% of the value of the business.
If you want business assets (such as real estate, equipment, vehicles, etc.) to be divided in a divorce, then you must name the business as a party in the divorce.
Most spouses are satisfied with getting the value of the business in cash.
Can You Lose Your Business In a Divorce?
It depends upon what you mean by “lose.”
Most court judges are not going to take a business you started during your marriage and that you run without your spouse and give it entirely to them. Instead, a court will value your business and give your spouse one-half the value and let you keep the business.
However, depending upon the value of your business, if you do not have enough cash to provide your spouse with one-half of the business value, you may need to sell the business and split the proceeds. So in that sense, you may lose the business because you have to sell it.
My Business Partner Is Getting a Divorce
What if your business partner is the one getting a divorce? How does that affect you?
The good news is that your portion of the business doesn’t change. Their spouse will be entitled to half of your partner’s share of the business, not yours.
For example, if Sally is a one-third partner in a business with two other partners who also each own one-third, her spouse is likely entitled to one-half of her one-third—approximately 16% of the total business’ value.
However, you might then find yourself running the business with your partner’s spouse. For example, if her interest in a portion of the business is fulfilled by issuing her stock, she is now part owner of the business. If that stock has voting rights, she may be able to affect the business without knowing anything about how it works.
How Should I Prepare For a Divorce If I Own a Business?
This is a tough spot to be in.
On one hand, everything you do as a business owner is designed to maximize the value of your business. However, the greater the value of the business, the greater the value of your spouse’s interest in the business.
To combat this, some business owners try to devalue their business before their divorce. For instance, they may take on a massive liability to purchase new equipment or carry a larger inventory.
Whatever you decide to do, make sure that there is a valid, business reason to take the action you are considering. You want to avoid being accused of intentionally devaluing the business incident to a divorce action.
For example, if you were already thinking about investing in new equipment to maximize your production efficiencies, then now might be the right time to take on a significant liability for the new equipment. However, I don’t recommend taking on excessive debt simply to spite your spouse.
Some business owners think that they can just keep the business profits sitting in retained earnings. By keeping business profits in retained earnings, they try to lower their income from the business. Unless there is a policy or shareholder agreement to hold on to retained earnings with a legitimate business purpose, that plan might backfire.
How Do I Protect My Business In a Divorce?
First, as best you can, try to keep your business and you separate. In other words, you don’t want your business to be determined to be your “alter ego.” It’s much better if you and your business are considered separate entities.
Second, you should consider having a prenuptial agreement in place to address the business in a divorce. If you’re already married, however, you can get what’s called a “postnup.”
Third, you should have a partnership agreement in place anticipating what might happen in the event of a divorce.
My final recommendation would be to consult with a business lawyer about strategy and options in the event of an impending divorce.
Can I Sell My Business Before a Divorce?
Yes, you can.
Anything you do prior to a divorce that cannot be considered “marital waste” is perfectly acceptable. However, if you sell the business, the proceeds from the sale will likely be considered marital and your spouse will be entitled to 50% of the sale proceeds.
As a business owner myself, I’m no stranger to the worries and concerns that keep you up at night. After all, your success and wellbeing directly depend on the hard work you put into your company night and day.
Starting a divorce can be difficult. In fact, it’s one of the most stressful events you will ever experience. This makes it especially important to have a guide who can help you identify your rights and responsibilities that you might overlook trying to do it yourself.
Having an attorney who is 100% focused on family law and divorce is essential, because you need a professional who understands everything about divorce: the anger, fear, betrayal, and anxiety about your financial future.
Divorce and divorce-related situations are all we do here at Leap Frog Divorce. We’re ready to help you today, and we have financing options. Call us today at 407-377-7108 or send us a message. Just let us know what you need help with, and we will contact you quickly!