Business and Distribution in Divorce
You and your spouse own and operate a thriving business. Managing daily operations seems almost effortless and financial results exceed all expectations. Life is good, except for one problem. Your marriage is not what it should be and you are contemplating a divorce. You are worried about how a divorce will affect the business. Could it destroy a lifetime of hard work?
Business Valuation
The first step in answering this question is assessing the value of the business. A valuation expert, a forensic accountant, will provide this essential information. A business valuation is a complex computation considering such things as the value of both tangible and intangible assets, current and projected cash flow and outstanding debt. The valuation expert will provide an estimated value of the business as well as a cash flow analysis (based on an average of the past 3 to 5 years) to help determine the available income to determine support.
Based on the valuation the divorcing couple must then decide how to deal with the business. The options include continued joint ownership and management, buyout of one spouse’s interest by the other, a total sale of the business or its complete liquidation. If the business was owned by one spouse prior to the marriage the increase in value during the marriage is potentially subject to equitable distribution of the marital estate. The income generated and the other spouses’ role in the business, if any, will be considered by the Court in determining support, if applicable, and the distribution of the business. Even if one spouse had nothing to do with operating the business, the fact the parties were married creates an equitable interest in the business by both spouses.
Equitable Distribution
Once established, the fair value of the business becomes part of the marital estate and is subject to equitable distribution. It is important to understand equitable distribution means a fair distribution of the entire marital estate and not necessarily an equal division of each asset.
Typically, both income stream and the value of the business help determine the price of the buy-out of the other spouses’ interest in the business and ongoing support. The court will consider when the business was established, the length of the marriage and income generated by the business when determining how to divide the business and establish a support figure.