This is the second part in a series discussing what happens when a married couple with shared business interests decide to divorce. The first part of the series explains the types of business interests spouses may share. Part of the process involves valuing the business and determining options to divide the business interest.
Valuing a business in divorce
Before a married couple or family court judge can approach the issue of how to divide business assets, a complete valuation of the business must be considered. This involves an assessment of the business’ assets and debts.
A couple can conduct their own valuation, coming to agreement about the complete value of the business. However, two people who have decided to divorce likely won’t see eye-to-eye during the valuation process. Alternatively, hiring an outside business evaluator to conduct this process could be the more productive option. The Court can appoint a joint evaluator or each party can seek their own valuation.
Whether it is a one-person home accounting firm, a sit-down restaurant, or a chain of dry cleaners, the evaluator will consider every aspect of the business to determine its value.
This includes all assets and liabilities related to business ownership, including but not limited to operations, bank holdings, investments, outstanding loans, property holdings, cash-on-hand, employee compensation, and physical assets such as equipment, furniture and inventory.
Depending on how well the spouses have communicated, during the valuation process it may be revealed that the business is making more money than one spouse thought, or is suffering from a surprising amount of debt.
Once the business’ value is accurately determined, the couple will have a more realistic picture of how the assets might be divided, and what they will be entitled to.
Marital vs. non-marital business assets in divorce
During divorce proceedings, the court looks at the couple’s assets, and determines which are considered marital — owned equally by both spouses — and which should be designated non-marital.
Once this is determined, the court has complete discretion to decide how to divide a business’ assets between divorcing spouses.
In some instances the distinction between marital and non-marital property is clear, while other assets require consideration to determine which bucket they belong in. Similar deliberation goes into deciding whether and what portion of business assets will be designated as marital assets.
Though one spouse may be listed as the sole legal owner of the business, it’s common in a long-term marriage for marital money to move in and out of a business. The couple may have used equity from their marital home, for example, to start or expand the business, or prop it up during lean times.
While the other spouse was not a business owner, in this example assets from his or her shared marital “pot” were used in the business. This type of financial contribution can affect how a family court judge views designation of marital and non-marital assets related to the business and, consequently, change the determination of how to divide those assets. For example, a Court could reimburse the marital estate for its contribution,
The judge may also take into consideration whether one or both spouses acted as an employee of the business. If the non-owning spouse also worked at the business, a judge will consider that fact in determining the split of assets — even if that spouse also earned a wage.
Dissipation of business funds in divorce
During divorce proceedings, one or both spouses may choose to conceal money, investments, debts or property in an attempt to fraudulently alter the outcome of the court’s decisions related to maintenance, child support and division of assets. They may also spend excessively, or sell marital assets as a way to punish their spouse.
The legal term for these actions is “dissipation,” and divorce cases in which one or both spouses has business interests may be especially prone to this issue. A business provides more opportunities to hide or obfuscate assets by filtering them through business transactions.
Types of dissipation of business assets during divorce proceedings include:
- Concealing business income by hoarding cash or opening alternate bank accounts or investment accounts.
- Selling business assets such as property, equipment or inventory outside the normal course of operations, and not accounting for it.
- Reducing one’s salary or normal business dividends to artificially reduce personal income that could affect decisions about maintenance and child support.
- Paying out dividends or salaries to third parties as a way to fraudulently reduce the business’ value.
Potential final outcomes of business in divorce
Divorcing spouses look at a few potential options for what could happen to their business interests after their divorce proceedings are final. They may choose one of these options or, in the absence of an agreement, the court may decide for them.
Sell the business: The spouses decide to divest of the business completely, sell it and divide any profit in an agreed-upon split.
One spouse buys out the other: If one spouse wants to keep the business, they can buy out the other spouse for an agreed-upon price.
Remain co-owners: It’s not common, but some divorced couples continue to run successful businesses together. However, this option should be given careful consideration, as future emotions and personal contentions can damage the business. For example, one partner could make a business decision that creates a liability for their former spouse.
Spouses litigate over the business: If they cannot agree about the future of the business, spouses may find themselves in litigation, letting the court decide. This should be avoided, if possible, as the process of litigation could damage the business. It is more advantageous for the parties to make an independent agreement.
If you enter into divorce proceedings, or anticipate you will, keep track of business financials, including recent history of what was spent, sold, transferred or otherwise disposed of.
Assemble as much information and documentation as possible, which will be especially useful to determine whether investigation of dissipation is warranted.
Be prepared to provide all individual and corporate tax documents during divorce proceedings.
Reviewing and discussing these issues with your attorney is of extreme importance.
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