Division of Businesses

An issue that arises frequently during a divorce is what happens to a business started or operated during the marriage. If the business was acquired during the marriage, or before the marriage but marital money or labor went into the business during the marriage, than at least some part of the business is “marital”.

Sometimes the spouses will each walk away with a portion of the stock or ownership interest in a business, and sometimes a business is sold and the proceeds distributed to the spouses as part of the divorce. A more common outcome is one spouse takes the business, especially if it was primarily one spouse running the business during the marriage.

The issue that then arises is valuing the business. Sometimes the parties will informally value or reach an agreement regarding the value of the business, to avoid the costs of business valuations. If the value of the business is significant, however, one or both parties often want a valuation to know what they are bargaining for, and to remove some of the uncertainty that comes with not having a valuation. If the value of the business is going to be litigated, the parties will most likely use business valuators with the appropriate certifications and expertise to allow them to provide an accurate valuation, that can hold up in court if the issue goes to trial. As is probably clear from all of this, a thorough business valuation by a certified valuator is not inexpensive.

One factor that is a bit different in valuing a business for a family law case than in other contexts, is that the value of a business in a divorce does not include “personal goodwill” attributable to an owner/spouse, and does not include the value of the owner’s labor/reasonable salary after the divorce. A spouse’s labor after the divorce is “non-marital”. Personal goodwill refers to customers coming to the business based on what they know about the spouse, versus based on the name recognition or good reputation of the business, and personal goodwill after the divorce is also “non-marital”.

Some of the others issues that will go into the valuation, in addition to the technical factors – industry data, comparables, multiplies, etc. that a valuation expert would look at, are: What is a reasonable salary for the owner/spouse? Are any of the listed expenses of the business not valid expenses – e.g. travel or an automobile, if these expenses are not needed or reasonable for the operation of the business. The spouses will have different interests regarding issues like these, and they are relevant, because, for example, expenses reduce the net income and generally then the value of the business, so not counting some of the expenses would tend to increase the value of the business.