When you get a divorce in Florida, all of your assets must be identified, categorized, valued, and fairly divided between you and your spouse. A business, if it was started during the marriage, will likely be categorized as “marital.” This means the value of the business must be fairly divided, also known as equitable distribution, between you and your spouse.
If you have other owners or partners, this can get more complicated.
It is important to know how your business or your spouse's business will be valued because it can significantly impact the value of your marital estate and how much you may be entitled to in a divorce.
There are different methods used to value businesses and there are experts who can be used to perform a business valuation. There are more than a few business valuation credentials that financial professionals can obtain related to business valuation.
Here are some of the most common questions people ask about business valuation and divorce.
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 by yourself or with others and give it to your spouse. Instead, a court will value your business and give your spouse one-half the value and let you keep the business.
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.
DOES MY WIFE GET HALF MY BUSINESS IN A DIVORCE
Your spouse is entitled to one-half the value of your business if the business was started during the marriage. Any assets, including businesses, acquired during the marriage are presumed to be marital assets subject to being divided between you and your spouse.
There are different ways to value a business. Whatever value you and your spouse agree upon or the value assigned by your judge will be split between you and your spouse.
IS A BUSINESS CONSIDERED MARITAL PROPERTY
Marital property is considered to be any asset acquired during the marriage. So, if you started a business during your marriage, it will probably be categorized as marital. If it was started prior to the date you got married, a portion of the business' value will be considered separate, nonmarital property and 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.
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.
HOW IS AN LLC TREATED IN A DIVORCE
An LLC, also known as a Limited Liability Company, is one form of business entity. There are other business entity types like, sole proprietor, partnership, and corporation. An LLC is a business entity type.
An LLC is usually treated as a separate entity from the owner. In other words, the assets of the LLC are not assets of the owner. If 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.
Many people and other 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 IS A BUSINESS VALUED IN A DIVORCE
There are several different methods for valuing a business in a divorce as follows:
- Income-based approach
- Asset-based approach
- Market-based approach
The income-based approach values a business based upon the company's past and current earnings, as well as 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 other, similar companies. Problems arise when a business is rather unique and there are no comparable sales.
Good Will is another important concept when it comes to valuing businesses. There is not enough room here to give a thorough and proper treatment of good will. 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 without that person is likely to be $0.00 or significantly reduced.
MY BUSINESS PARTNER IS GETTING A DIVORCE
If you own a portion of a business and have a partner or partners who own the remaining portions, your spouse is probably entitled to one-half of the portion of the business you own. Here's an example:
If Sally is a one-third partner in a business and she has two other partners who also each own one-third, her spouse is likely entitled to one-half of her one-third; 50% of one-third is approximately 16% of the total business' value.
You might also 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 the business.
HOW SHOULD I PREPARE FOR A DIVORCE IF I OWN A BUSINESS
This is 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.
So, do you try to devalue the business in some way. Maybe you think you should take on a massive liability for new equipment or to carry a larger inventory. Or maybe you decide to take on a large liability for new equipment.
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 have been 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.
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. This means that you and your business are not separate entities and are really one in the same.
Second, you should consider having a prenuptial agreement in place to address the business in a divorce.
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.
HOW IS A BUSINESS DIVIDED IN A DIVORCE
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 with be equitably distributed between you and your spouse.
If you do not have cash to compensate your spouse for their interest in the value of the business, your business could issue stock to your spouse. However, if that stock has voting rights, you may find yourself in a difficult position 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 his or her 50% of the value of the business.
DO BUSINESS ASSETS GET DIVIDED IN A DIVORCE
If you want business assets to be divided in a divorce, then you must name the business as a party in the divorce. It would be unusual for a non-owner spouse to seek the asset of the business. Rather, most spouses are satisfied with getting 50% of the value of the business in cash.
CAN I SELL MY BUSINESS BEFORE 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.
DO I NEED A BUSINESS VALUATION EXPERT
In a typical, traditional divorce, also known as “Divorce Court,” each spouse will hire their own business valuation expert to provide evidence and testimony regarding the value of a business.
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 and use their valuation.
When I have a divorce case that involves a business, I almost always hire a business valuation 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 expert.
CONTACT A SKILLED, AGGRESSIVE, COMPASSIONATE AND EXPERIENCED ORLANDO DIVORCE LAWYER TODAY
Starting a divorce can be difficult. Divorce is the second, most stressful event someone will ever experience. It is 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 focuses their practice 100% on family law and divorce is essential because you need a professional who understands everything about divorce. The anger, the fear, the betrayal, and the anxiety about your financial future.
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