What will happen to my business in my divorce?

You’ve put blood, sweat and tears into building up your business. Bad enough your marriage didn’t work out. Is your business also at risk?

A business is considered property in divorce. And in MA, all property is considered for division.

The first question is: what’s the business worth?

Like all other property in divorce, to be fairly divided, a business’s value must be determined. This typically requires a business appraisal - otherwise known as “valuation.”

The person conducting the appraisal will consider the business’s assets and liabilities and projected income, among other factors.

The parties can agree on a joint appraisal and accept the suggested value from that single professional. Or they can each hire an appraiser.

If there are two appraisers with different opinions on value, which is not uncommon, the parties will have to negotiate to resolve that issue, and if they can’t come to an agreement, the issue either goes to mediation or the court ultimately decides a fair value.

Appraisals can generally cost anywhere from $5,000 on the extremely low end to tens of thousands of dollars, depending on the size and operational complexity of the business.

Not all businesses are appraised in divorce, however. If it’s a smaller operation, especially a solo-business that consists only of the owner’s efforts, and the income is already being factored into a child support or alimony order, the parties may decide that a business valuation is cost prohibitive - that there isn’t enough value for purposes of property division to justify the cost.

Once you determine the value, what do you do with the business?

The parties may sell it. But more commonly, one spouse keeps the business, and if the other spouse is entitled to some of its value, there’s a buyout. If there are other assets, the parties can agree to an offset to simplify division. For example, one spouse keeps the house, and the other the business.

How can you prepare for a business valuation?

You can make sure your finances are organized. Appraisers may ask for the last three years of tax returns, business bank statements, and sometimes more recent profit and loss statements, among other records.

What you should not do is try to manipulate numbers. Be careful about making substantial and unnatural changes to your business to either decrease its value or your income either in anticipation of or in reaction to a divorce. Remember that the other party may be hiring an expert to dig into your financials. And if you’re caught with your hand in the cookie jar, the court may penalize you for tampering with the asset, and if your income’s unnaturally reduced, it may find that you’re capable of earning more money and attribute the income to you - treat you as if you earned the higher amount.

Businesses are often the most valuable asset in a divorce. A business valuation may be necessary to determine its value. The party primarily responsible for running the business usually ends up keeping it. But, depending on its value and the value of other assets, a buyout of the other spouse may be necessary, which sometimes involves offsetting its value with that of other assets.