Typically, the largest assets divorcing spouses need to divide are the marital home and any retirement or pension that has been earned during the marriage. However, more and more frequently, one or both of the spouses has started a small business that may have become one of the largest assets in the marriage. So, what is it worth and who gets it?
(For the purposes of this article, I am assuming that the small business is a marital asset and thus, is subject to equitable distribution in North Carolina – as opposed to a separate or mixed asset.)
Valuing the Business It is hardly surprising that divorcing spouses are unlikely to agree on the value of the business. The longer the business has existed, the more complex the business structure, and the more economic fluctuation it has experienced, the more likely it is that a financial expert will be needed to review the business’s history and financial records. Typically, one of three methods will be used to value closely held businesses: the cost approach (book value), the income approach (capitalization of the income stream), or the market approach (using comparable sales).
Valuing a business can be extremely costly, ranging from $5,000-$20,000 (or more). Where there are minimal concerns regarding the accuracy of the financial records, divorcing spouses may choose to share the cost for a single, neutral valuation expert. However, when one spouse believes that the business is worth far more (or far less) than what the other claims, he/she may elect to hire their own financial expert to value the business and then leave it to the court to decide which value it finds the most reliable.
Quick Tip: Family lawyers experienced with dividing up businesses in divorce usually have a list of experts to select from and typically will arrange to hire the expert directly to ensure that the report provided will be protected attorney work product.
Who Gets the Business? Once you know how much the business is worth, the next problem is deciding who gets it. While there are some divorcing couples who may remain able to share ownership of the business after a divorce, this arrangement can only work when the separation/divorce is amicable and the former spouses are able to set aside the marital disagreements and maintain a close working relationship. However, this is rare. More commonly, the business needs to either be given to one of the spouses or sold.
Where the business is one that relies on the unique abilities, skills or talents of one of the spouses (for example, a bakery in which one of the spouses is the baker or a firm offering professional services in which only one spouse is licensed to provide such services) or was owned and managed by only one of the spouses, with little to no input or participation from the other, it makes more sense for ownership of the business to be given to that spouse. In that case, the spouse receiving the business needs to buy out the marital interest that belongs to the other spouse. This can either be done in a lump sum (if there is enough cash on hand available to do so), in a structured buyout that takes place over time (if there will be cash available in the near future), or by trading other marital assets of equal value (for example, the spouse being bought out of the business may receive, instead, the marital home and/or other real estate, retirement account(s), or other personal property).
Unfortunately, it has become increasingly common that the business is the largest or only valuable asset owned by the couple and there is simply not enough cash on hand now or in the near future to allow one spouse to buy out the other spouse’s marital interest. In this case, the divorcing couple may have no choice but to sell the business and divide the proceeds. This presents challenges and may delay the process of division, since it may be difficult to find the right buyer and sell the business for an acceptable price. This option is usually the least desirable one and taken only after every other possible option has been thoroughly considered.
The ownership of a small business may have an impact on a number of other issues in a divorce that are outside the scope of this article, such as child custody, child support and spousal support or alimony. If you have any questions, we invite you to contact us. Dana M. Bellingrath, Esq.