Divorce for Virginia Business Owners

Posted on Mar 13, 2017 by Katie Carter

A lot of divorcing couples own a business–something that tends to complicate equitable distribution. Equitable distribution is a fancy word we use to describe how property is divided in Virginia. Equitable distribution, unlike community property, doesn’t necessarily assume that property will be divided 50/50, but that negative and positive monetary and non monetary contributions can affect the way a judge would divide property between the parties. Things like adultery (a negative non monetary contribution) or running carpools and preparing meals (a positive non monetary contribution) work alongside the salaries or wages that each of the parties earn (obviously, a positive monetary contribution) in determining how everything will be divided.

That doesn’t mean that things won’t be divided 50/50; in fact, probably in most cases, things are ultimately divided relatively closely to 50/50 anyway. Still, equitable distribution allows for the possibility of a different distribution based on the way the facts apply in each specific case.

Owning a business is probably pretty obviously a positive monetary contribution–of course, assuming that you’re earning money on the business. If you’ve run the business during the course of your marriage, it’s probably also a marital asset so, to some extent, it’s subject to division in the divorce. That doesn’t necessarily mean that your spouse’s interest is equal to yours, or that you’ll have to sell your business to buy out his interest, but it does usually warrant a closer look at the finances and what’s available to be divided.

Different businesses work differently, and that can affect the value and the way that the interest in the business is divided. First and foremost, we’ll want to look at the business itself, including how much money is made, what types of assets exist, and how much of the value of the business has been appreciated during the marriage.

In some cases, we involve a professional like a business valuator to determine the value of the business. There are a number of different “models” used by business valuators to determine exactly how much a business is worth. Of course, in a contested divorce, there are often two business valuators involved (one for each side), and they present different values for the business. One side argues that the business is worth more; the other argues that it’s worth less (thus diminishing the value of the other spouse’s share in it). In an uncontested divorce, on the other hand, we usually try to use documents (like tax returns and bank account statements) to determine the value of the business–and, ultimately, reach an agreement about how the value of the business can reasonably be divided between the two parties.

Different businesses have different values, which is important to remember. I once had a consultation with a woman who was so concerned about losing the rights to her business that she was willing to give up all sorts of other things that she was entitled to as a result of her divorce (like, for example, spousal support). When I questioned her a little more about her business, she told me that she was a Lularoe Consultant. She went on to tell me, very seriously, that she had only just started it, and had sold a little less than $2,000 in inventory. In fact, because of the various start up costs, she hadn’t even actually made any money yet. (Apparently, Lularoe Consultants have to buy a LOT of clothes to even get started selling.)

Obviously, when there hasn’t been any money made, the value of the business is virtually nonexistent. Though it’s possible that her husband could ask that she reimburse him for half of the initial investment in the clothes, there really isn’t any “value” to her Lularoe business–and certainly nothing that would warrant giving up spousal support.

I had another client with a photography business. Though it had been owned and nurtured throughout the marriage, there wasn’t a whole lot of additional value there. My client drew a salary throughout the marriage, but that money went straight back into the family–she used it to purchase furniture, to pay for day care for the child, purchase groceries and other necessities, etc. Though she could continue to expect to earn income from the business, there wasn’t anything really there to divide. She had a camera, a computer, some lighting equipment… But none of that really amounted to much. (And, of course, her husband had some expensive guns of his own of at LEAST equal value.)

As far as I could tell, most of the “value” of her business (because there’s really no specialized inventory or equipment) is personal goodwill–basically, her ability to make money from her client list based off of her specific talent. Virginia courts have held that personal goodwill is not divisible in divorce. (And, really, how could it be? You couldn’t really assign a value to it.) As far as dividing the value of the business in divorce, there’s really not much there to divide.

Other businesses have greater value, more assets available to divide, and, therefore, more value as far as the divorce is concerned. If you own a business (or your husband owns a business), you’ll definitely want to talk to a divorce lawyer about what your interest might be, how it might be valued, and how you might expect to see it divided in divorce. In certain cases, it might be worth waiving an interest in another asset in order to keep your interest in the business–but you’ll definitely want to have an open, honest conversation with your divorce lawyer before making any decisions.

For more information or to schedule an appointment with one of our attorneys, give our office a call at (757) 425-5200.