How do we divide a family business in divorce?
Coming from a family that owns a local business and now working for another small family-owned business, it’s pretty safe to say that businesses are something that I think about a lot. You might even be surprised at how often it comes up, but there are lots and lots of different types of businesses that families run.
The type matters, too! I’ve worked on the obvious cases – doctors and lawyers and financial types who owned their own firms. I’ve also worked on cases where there was a car or airplane repair shop, a medical supplies company, retail, dry cleaners, grocery stores, restaurants, photography businesses, and more.
Businesses are complicated! And, to the extent that the business was started or run during the course of the marriage, a certain amount of it could be deemed marital property.
There are all sorts of issues related to businesses – what’s divisible in divorce, what the business is actually worth (both in terms of profits and, also, in some cases, machinery, equipment, or other assets), and the amount of income generated which can relate back to other areas of the divorce, like child and spousal support.
Technically, something is marital property if it was earned, purchased, or acquired during the marriage – so money earned, profits generated, equipment purchased, etc. is marital in a family business, even if you didn’t actually, personally, work in it.
How do we value a family owned business, and determine who gets what in a divorce?
That’s the million dollar question, isn’t it? It’s actually fairly complicated. And, as you probably have already surmised, an attorney is not the same thing as a business valuation expert. In fact, it’s pretty difficult for us to just know what a business might be worth. No matter how many of these cases we’ve handled before, every business is difficult – and, often, there’s a lot that we don’t just know, even after meeting with a client or looking at their Quick Books.
In most cases, we employ an expert. That doesn’t necessarily mean that the expert will go with us all the way through to trial, though he or she certainly could, if the case was complex enough and warranted it. In many cases, there’s not much to the business beyond the income it generates – so, though that’s useful for spousal support purposes, there’s not a whole lot there to actually divide.
How do we know? Well, usually, our expert tells us what to look for. He or she asks for specific documents, which we provide, and they do an analysis which helps gives us a better idea. Do we need to dig deeper to find out what’s there, or do we just negotiate spousal support as a result of the income generated from the business? Either way, talking with an expert – in this case, typically a business valuation expert – can help give us a lot more clarity than we might initially have.
What if I don’t have the documents I need to do this analysis?
That’s pretty common, especially if it’s “his” business. And, if you’re headed towards divorce, he probably won’t just hand over the documents you need to analyze. Right? Well, it may very well be necessary to file for divorce. When we file for divorce, a whole host of tools become available to us – in this case, discovery being the most important. In the discovery process, we can ask for what we need (access to his Quick Books, profit and loss statements, credit card bills, etc) that will help us (and our business valuation expert) get to the bottom of what’s going on in the business and what it’s ultimately worth.
It’s not uncommon that one spouse wouldn’t have access to all that information, and it’s even less surprising that, after the word “divorce” is uttered, it’s much harder to get access to it! That’s exactly what discovery is for. It’s not easy – in fact, it’s expensive and fairly time consuming – but it’s a great way to get the information that you can’t really get any other way.
What if it’s my business? I don’t want to divide it!
It’s usually not a question of actually dividing a business. I only use that word in the sense that we “divide” assets and liabilities in a divorce. But that doesn’t mean that we cut a house in half or that we give the non-business-involved spouse half of the company to just…run. Not at all.
In most cases, it’s not even an issue. In, say, a photography business, though it may be profitable, there’s not necessarily a lot of extra value there. There’s value in you, the principal person, but that’s personal goodwill and not divisible. Even the cameras that you have, which may be relatively valuable compared to the kind of cameras that other people own, are probably not shockingly expensive. In that case, there’s probably not a lot to divide. It may be a question of buying out his relatively minimal interest, paying spousal support (assuming you earn more than he does, though that may still not be the case), or him waiving interest in your business entirely.
We can always try to just get him to waive his interest in the business – in all honesty, that’s what happens in most of my business cases. Most family owned businesses aren’t that big, and don’t really go beyond the principal members. That’s not to say that they aren’t profitable, of course – but they don’t necessarily lend themselves to valuing and dividing. (Remember – personal goodwill is not divisible!)
What should my first steps be, if we own a business?
If you own a business, it’s probably a good idea to talk to an attorney sooner rather than later. Figuring out what’s there is an important part of the process, and it probably goes without saying that this makes the divorce a little bit more tricky. It’s not a big deal, but you will want to get that information before you start making offers or coming up with specific plans for how to divide your assets.
Talk to an attorney, come up with a plan of action, and figure out how to move forward. Need help? Give our office a call at 757-425-5200 to schedule an appointment with one of our licensed and experienced Virginia divorce and custody attorneys today.