What Happens To Your Business in Divorce
If you are a business owner, it is imperative that you understand what happens to your business in divorce.
Your Business – Marital or Separate
In a divorce, “Marital Assets” are typically things acquired during the marriage, individually by either spouse or jointly by the two of them.
Separate or “Nonmarital Assets” are generally things acquired by either spouse prior to the marriage. Also included are things gifted to you or inherited by you individually. Importantly, this also includes any assets you and your spouse identify in a valid written agreement like a Prenuptial or Postnuptial Agreement.
A Marital Business – What Does My Spouse Get
When a spouse starts a business while they are married, the value of that business is considered a “Marital Asset.”
This is important. Most business owners view their business as theirs. They believe that because they started the business and worked hard to build it, that it belongs to them. This is not entirely correct.
Business owners with a marital business have a “silent” shareholder or co-owner. That person is their spouse.
Your spouse may not have anything to do with the business. However, when it comes to divorce, they are entitled to an interest in the value of the business. In other words, whatever your business is worth will be split between you and your spouse in divorce.
How Do You Split a Business
Typically, the starting point is to value the business.
There are Financial Professionals who have earned one or more designations or certifications related to business valuation. When I am working with a client who owns a business, I will hire the services of a business valuation professional most of the time. Most divorce lawyers will rely on a business valuation expert as well.
There are different ways to value a business and your business valuation professional will likely value it using all of the methods available. Depending upon where you get divorced (i.e. in what State) you may be limited to using a specific valuation method in Court. Your business valuation professional will likely know what valuation method your State may require.
Business valuation can get quite complex depending upon your business, so it is wise to hire a professional to help you.
For example, there is a concept called “Goodwill.” This is just one of the components that make up a business' value. There are different methods of goodwill valuation. In addition, there are different types of goodwill. That discussion is beyond the scope of this blog article. So, let's focus on one type of goodwill that is fairly easy to understand.
Goodwill is basically the reputation earned by a business owner over time and is considered what they call an “intangible asset.” Think of this as “Personal Goodwill.” In other words, it is the business owner's reputation which is personal to him/her.
If a business could not exist and be successful without the current business owner, then the value of the goodwill is going to be rather high and the value of the business will be lower. It's value would be a lot lower than a business that could be easily bought and sold to someone else and run successfully without the previous owner.
This is important because personal goodwill, the value of the reputation of the business owner, will be excluded from the business' value to be split between the spouses. We see this a lot with professional practices, such as small law firms and dental practices.
Will I Be Forced To Run My Business With My Ex-Spouse
Mostly likely no.
Our Courts do not want to force former spouses to be in business with each other. So, the divorce of your marital relationship will likely also result in the divorce of your business working relationship. If your spouse was not involved with your business, this is likely not going to change how or what you do in your business.
However, if you and your spouse were both active in the business, your divorce will probably result in some big changes. You and your spouse will not be working together anymore in the business.
What Can I Do To Protect Myself
Planning for divorce is important.
It is critical to think about what might go wrong in the future of your business with partners, co-owners, employees, and your spouse.
A good business lawyer can help you understand your options before a divorce and can help you think about potential pitfalls of running your business with others. You might consider a buy-sell agreement. Or, maybe a Postnuptial Agreement would work to protect your business. The important thing is that you have options. Get some information to help you make a fully informed decision about what to do.
What Value Will The Court Assign To My Business
Often, a divorce trial will have two, opposing business valuation experts. You will have one and your spouse will have one. Many times, these two opposing experts will not agree on a value for your business.
Our Courts are not permitted to take two, competing valuations and simply split the difference. Rather, they have to assign more credibility to one expert versus the other. Your Judge will probably accept the recommended value for your business from whichever expert is seen by the Court as more credible.
What happens to your business in divorce can be a rather complex question to answer. At the end of the day, it will come down to what the value of your business is. That value will be split between you and your spouse.
You can rest easy that your Judge will probably not force you to stay in business with your spouse. If it is primarily your business, you will likely continue to run it yourself in the future.
I hope this information was helpful for you.
Be well, and stay safe!