Business Valuation and Divorce
I hesitate to use absolutes, because, in law, there are very few. We rarely say “never” or “always”; we often say “it depends”.
But I’m pretty sure I can absolutely say that, if you or your husband own a business, your divorce is going to be more expensive than a divorce where we have two partners with two W2s.
Even if you think things seem pretty cut and dry, it often isn’t. A business is often a marital asset, and there’s the question of how much of its value of marital. It’s also mixed up with spousal support, because business owners are often drawing on some of the business assets for their actual income.
How are businesses valued and divided in divorce?
I’m an attorney. I’m not an expert in business valuation. Though I often look at tax returns and other documents, when I value a business, I use an expert.
A business valuation expert will calculate the value in the business, and offer an opinion to the court. It’s not that easy, though. Your spouse will likely have a business valuation expert, too, who opines that the business is worth something different.
There are a number of different methods available to help these experts calculate the value of a business, and they employ different models at different times depending on the type of business and what, in their opinion, will yield the most accurate result. But business valuation isn’t a finite thing; it’s a situation where reasonable minds can (and do!) differ.
A business doesn’t have an exact market value, like a car. There are a lot of moving pieces, and reasonable minds – as in, your business valuator and your husband’s business valuator – will almost certainly differ.
Businesses are different, too. A dental practice is different from a dry cleaners which is different from a sporting goods store which is different from a car repair shop. With very few exceptions, though, most of us are not Jeff Bezos, so, luckily, we don’t have to value something as big as Amazon. (Which, I am certain, cost a pretty penny when he got divorced!)
Still, we often see business valuations running in the $10k range and higher, depending on the complexity involved. And that’s just the business valuation, not any litigation associated with the differences in opinion on the value.
The cost for the business valuator to run the valuation is a cost that is separate and distinct from the attorney’s fees related to negotiation and litigation.
It’s not the same as two W2 employees, where it’s easy to see what ownership they have in a company (usually, none, unless there are stock options or something – but, in any case, that’s easier to divide than an entire business), and exactly what their income is!
It’s important to take the time to figure out what’s there, what its worth, and how it should be divided. The business itself is a property interest, like your house or your retirement accounts, but its also a challenging, complicated piece of property.
Are there any parts of the business that belong to the owner separately, and aren’t divisible in the divorce?
Yes, there are. To the extent that some parts of the business are separate – if the business was formed prior to the marriage, or if there are other co-owners of the business who are not the spouse – it won’t all be divisible, or entirely seen as a marital asset.
In general, personal goodwill is also a separate asset. Personal goodwill refers to the fact that there is some good, some benefit to the business, simply from its association with YOU, and the work that you’ve put into it. You being delightful brings in business, and, though that has value (it certainly does!), its not divisible in divorce. So, if you’re so wonderful at your job that you bring people in to your business in droves, you’d want to argue that it’s largely a result of your own personal goodwill.
How do you quantify personal goodwill, though? A good question, and yet another good example of the complexities associated with dividing a business in a divorce. It’s an inherently hard thing to attach a number to, especially since there’s not an easy way to determine market value. You can’t go to Amazon and buy some more personal goodwill since you’re running a bit low.
But it’s my business! I built it! Is there any way I can keep it after my divorce?
Yes, of course. Most people do keep their businesses after divorce. It’s usually a question of how you can buy your interest back from your spouse, or whether there’s something else valuable that you can trade with your spouse to get them to waive their interest in the business.
That could mean that you take less equity from the home, you take less in retirement accounts, or you even pay out money, either in a lump sum or a monthly amount. Obviously, you have much more freedom to decide what this will look like if you and your spouse are able to agree about how the business will be divided than you will if you go to court and let the judge decide.
It’s not easy to divide a business, and it often costs far more than in a case where the parties don’t own a business. But your business is important, and you’ve spent years building it! It’s important to get it right, to make sure that you take away from the marriage what you need to start over, and to keep on doing what you’ve been doing.
For more information or to schedule a consultation with one of our attorneys, give our office a call at 757-785-9761.