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What Happens to My Business in Divorce?
Will you lose your business? Will you have to sell it? Few issues in divorce have a greater financial impact than what happens to a business owned by a divorcee. Businesses are part of property division in divorce, and learning the basics about how they’re treated can help you prepare for the road ahead. The business is relevant to both property division and either spousal or child support, as it’s considered an asset and its income used in calculating support.
First, if there’s a support order, the income earned from the business will be used for purposes of the calculation. For both child support and alimony, total gross income is the key number.
For property division, the business is an asset subject to division. The parties must decide what they want to do with the business. If the parties are selling it, the proceeds will be included in the property division calculus. If one of the parties wants to keep the business, the parties can arrange for a buyout, which usually involves either a cash payment or an offset with other assets, such as investments or real estate.
However, whether the business will actually be considered a significant asset that warrants consideration in the property division calculus in the first place depends on its value. And whether a valuation is necessary depends on a number of factors, including the size of the business, its revenue, the number of employees, the length of the marriage, other available assets, and other factors. Generally, the smaller the business, the less likely it is that it’ll be a substantial factor in the property division.
A business valuation is an expert’s attempt to arrive at a value for a business for which no market price actually exists. It consists of the expert thoroughly analyzing the business, including revenue, assets, the owner’s compensation package, taxes, and the overall inner workings of the business’s financial management, among other factors. Business valuations are generally expensive and can cost tens of thousands of dollars, But they’re the most effective means of arriving at a reliable value.
Is a business valuation necessary? As lawyers say: it depends.
The picture on one end of the spectrum, a self-employed sole proprietor with a service business that has few assets and generates less than $50,000 per year in income, the marriage was only two years long, and that individual’s full income is being used to calculate child support. It’s highly unlikely under these circumstances that this business will be a significant factor in the property division. And a business valuation would certainly be cost-prohibitive.
However, on the other end of the spectrum, the business and the marriage are both 20 years old, there’s no child support or alimony, and the business generates millions of dollars per year in revenue. Under these circumstances, this business is certainly a significant factor in property division and a valuation is necessary. And businesses can fall anywhere on the value spectrum between these two extremes.
If a valuation is necessary, the parties must then decide whether they’ll hire an expert jointly or each hire their own. It’s more cost-effective to jointly select a valuator. But whether it’s in your interest to hire one independently depends on the facts and circumstances of the case.
Finally, although the business may factor into both support payments and property division, any income considered for support is factored into the valuation of the business for purposes of division.
If you own a business and divorce is on the horizon, it may benefit you to consult a divorce attorney sooner rather than later to prepare yourself for the process and protect your interests.