Virginia Divorce, Business Valuation, and MLMs
We’ve talked before about business valuation in a divorce. In a lot of cases, there’s not a whole lot of question about what someone earned and what they’re worth – we have documents like tax returns, pay stubs, W2s, and even retirement account statements – that set it all out in pretty straightforward detail.
In cases where one or both of the parties owns a business, though, it’s a little more complicated. The value inherent in a business isn’t just in terms of what income the business provides; in many cases, the business itself is worth something. Whether it’s the list of clients, the actual equipment used, or the goods manufactured, there’s value in the business model. When someone else could buy the business and then start running it themselves, there’s a value there.
In many of these cases, determining the value of the business requires an expert – usually, a business valuator. That’s beyond the scope of attorney work, so we often work with business valuation experts, CPAs, and others who help us determine the value of a business, and divide it for the purposes of the underlying divorce action. In many cases, it’s not so much a division as a buy out proposition; basically, one party takes a certain amount of money in exchange for their interest in the business. These business aren’t usually formally divided because of the divorce, but the value is still determined for the purposes of equitable distribution.
But not all businesses are the same. In fact, no two businesses are ever quite exactly the same, but I do think that a major point of divergence is between a traditional business model and an MLM-style (multi level marketing) business.
For a lot of reasons, women often become heavily invested in MLMs. Flexible hours, business ownership, and perks like all-expenses paid holidays convince women to invest in them every single day. If you’re one of those people, you’re not alone.
Of course, investment in MLMs can look very different depending on the case. I’ve had cases with women who had only ever bought products – and never actually made any real money. I’ve also had cases where my clients had a pretty impressive monthly income from their MLM. So, how are these businesses divided in a divorce?
Strictly speaking, of course, a business is an asset that is divided in a divorce. Much like any property entitlement, its divided between the parties. In fact, a divorce is looked at by attorneys and judges much like a business; the assets and liabilities are divided ‘equitably’ between the partners of that business.
An MLM isn’t the same, though. In a lot of ways, it’s not divisible or even possible to value like another, more traditional business might be.
If you’re running an MLM that isn’t making a lot of money – or maybe you’re even in debt for the MLM – it’s probably pretty easy. It’s not worth anything, or it’s worth a negative amount, and there’s no positive asset there to divide in the divorce. It’s probably sufficient to just say that he will waive his interest in your business, and move on. Maybe that means you keep the debt associated with it; maybe you reach a different agreement and divide the debt, but ultimately that would likely be up to whatever terms you could come up with in any separation agreement prepared in your case.
If you’re running an MLM that is making money, though, chances are good that your husband will want a piece of that pie. Though in general I wouldn’t recommend that anyone get involved in an MLM (there’s just too many people losing money BIG time because of the way these companies are structured), it also seems to me that a truly successful MLM is, in divorce terms, kind of a sweet spot.
Is it divisible? It’s hard to say with certainty, but I’m inclined to think not. Your ‘business’ doesn’t have its own inherent value; it’s not like you can sell it to any regular member of the public. Furthermore, most of what you’ve generated is a direct result of personal goodwill – like, the value of the connections that you bring to the business and the strength of your personal relationships – isn’t divisible in divorce, anyway. In many cases, there’s no real ‘inventory’ worth actual money, either. There’s ultimately very little to divide, in the way a business would traditionally be divided.
So, I’d be wary of proposals where he asks you to waive your retirement interest in exchange for his waiver of interest in your business. It might seem like a good deal to you, if you just look at the value that the MLM provides to you in terms of income each month, but there are also a lot of ways that an MLM style business differs from a more traditional business model. I would hate for you to waive something unknowingly thinking that you were doing what you needed to do to maintain your exclusive interest in your business. If you have questions, or if proposals like this start getting tossed around, it’s a good idea to consult with an attorney.
So, why is it a sweet spot? Well, I think in terms of valuation and division, an MLM is going to be very difficult. He’d have a hard time arguing that it’s worth, in dollars, the same as a business that you could sell, like a car repair shop or a medical supply company. So much of the value will be tied up in personal goodwill, which, again, isn’t divisible. So, in that way, I think you sort of get to have your cake and eat it too; you get the benefit of a ‘business’, in terms of setting your own hours and working more or less for yourself, but it’s not going to be divided the same way as a different type of business might be. (Again: not at all recommending that you try it, if you’re not already doing it.) At the very least, it’s worth sticking to your guns for a bit – even if you do end up throwing him a bone – to see whether you can get him to budge. In this scenario, I wouldn’t be too quick to give up the farm, so to speak.
Another way that a successful MLM business might impact your divorce – if it’s a successful one, that is – is through spousal support. It’s not just a question of dividing the business (which would be challenging, if not impossible, in the case of a MLM), it’s also a question of what level of income you have and whether one or the other of you might qualify to receive spousal support. It’s possible that, if your income each month is higher than his, that you could be required to pay spousal support.
Ultimately, an MLM is probably going to be handled differently than other types of business, and a good amount of the value that you’re seeing from it will stem from your own personal goodwill. It’s definitely worth consulting with an attorney, especially if you have questions about how it’ll be handled.
For more information, or to schedule a consultation, give our office a call at 757-425-5200.