3 Things Every Business Owner Should Know Before Filing For A Divorce

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You already know how much it takes to start a business from scratch or even continue it to match the legacy of your predecessors. With a successful business in hand and an oncoming divorce, a few common questions might be in your mind:

  • What is the value of my business?
  • How can I define the percentage of my business that should go to my spouse after divorce?
  • How can I get the best outcome for myself after giving a part of my business in alimony?

You will obviously protect your business passionately because it is about your income and expenditure, as well as the property laws in place that would determine the answer to the second question. Also, most business owners don’t have a prenuptial agreement arranged and signed, despite the fact that 50% of all first marriages in the U.S end in a divorce, as per the 2010 report by the National Marriage Project, University of Virginia.

Your Business Valuation Is Not Done With One Method

It would be a mistake on your part to assume that business valuators will derive a single numerical value of your business, based on which you can estimate how much you have to turn over to your spouse as a divorce settlement. 

There are three ways in which your business valuation is calculated:

  • Market approach: In this method, the value of your company in this market is measured by comparing it with other similar businesses recently sold off.
  • Cost/Asset approach: The net value of your business’s assets is calculated here to derive the value of your business. The liabilities are also considered to keep the expenditure in the equation.
  • Income approach: This approach is based on prediction. The present business valuation will be based on how much your business will probably earn with continued efforts in the future.

Depending on the size of your business, one or more of these approaches might work. However, it is also possible that one approach derives a positive result while the other derives a negative one.

Some U.S states like California and Washington State follow the Community Property Division for dividing the business (now a marital asset) between both parties in a divorce. Other states like New Jersey and Illinois resort to following the Equitable Distribution law. So you might want to use the method that derives the least value for your business under the governing property laws.

However, the valuation might be complex if you are instrumental in the business – called the ‘Key Person Risk.’ In this case, you won’t suffer much from the division.

  • You might have a client list that would follow you to your side of the business.
  • You might have the requisite licenses to run the business
  • You might have a very important role in the business’ income generation.

Deriving the value of a business heavily dependent on the owner is a complicated task.

Business Set Up Before Marriage? Acquisitions During Marriage Will Be Divided

Once your divorce reaches court and your marital assets are about to get divided between you and your partner, the apparent basis for this division would be equitability. But that doesn’t mean a 50-50 divide, right?

The size of your assets acquired after marriage invariably affects how the courts will divide it between you two. The larger the assets, the more the probability of a 50-50 divide. However, the nature of the assets assigned to you and your partner will also come to notice. 

So if you had successfully proved in court that the business was established before marriage and did not come under marital property, your partner might get away with a large section of the assets you acquired after marriage because they did not get any part of the business.

This might be good news for business owners who value their business over any other assets. Nonetheless, the presence of a good attorney and a qualified business appraiser (Certified Business Appraiser or Accredited Senior Appraiser) is highly recommended to avoid any wrong decisions.

Courts Decide How Your Goodwill / Intangible Assets Will Be Divided

There is more to division in the business during divorce than the tangible parts of it. The intangible parts include the rights to the business, as well as goodwill.

Goodwill is the value of intangible assets – divided into personal and enterprise goodwill. Personal goodwill is linked to you – the owner of the business. In states like Texas, personal goodwill is not subject to division as marital property – you get to take it with you. So, for example, if you leave the business and it incurs some losses as a consequence, that is your personal goodwill.

Enterprise goodwill is the one left with your business once you leave it. In this case, goodwill is associated with the part of the business that is marital property. So the Courts can decide how to divide it between you and your partner.

Let’s have a look at a case study of a small business owner to understand the topic better.

Fuzzibunz Owner Teresa Dupuy Lost Her Business in Her Divorce

Fuzzibunz is an online store for cloth-based diapers based in L.A. With the current trends in environment-friendly choices, you can imagine how well Teresa’s cloth-based diaper business was going. 

Teresa got the idea of starting this business three years into her marriage because she wanted better diapering options for her second baby. However, in 2005, she filed for divorce. Teresa was in one of those states where the other spouse mandatorily gets half ownership of the property accumulated while the marriage lasted – Louisiana. 

The business was a joint marital asset about to be divided 50-50 between her and her ex-husband; the terms were straightforward. However, due to the stress involved in the divorce, Teresa had a nervous breakdown. As a result, the Courts turned over the company to her ex-husband within a day.

To get back the ownership of the company, she had to provide a large sum of money, along with installments of $15,000 payments per month over several years, to her ex-husband. By this time, she was financially drained, with no resources to invest in her company’s growth.

Be Better Informed as a Business Owner Before You Seek Divorce

You wouldn’t want to end up like Teresa Dupuy, and prenups might not be your first thought when you marry the love of your life and things turn sour. The three things I mentioned that every business owner must know before filing for divorce are as follows:

  • Business valuation is not a one-equation math problem.
  • Assets acquired after marriage will be divided, even if the business isn’t.
  • Your enterprise goodwill is marital property – open to division by courts.

There are a few things that you might do to avoid unfair division of your business:

  • First, you can sell the business and then share the proceeds with your partner.
  • You can co-own the business together.
  • Third, you can pay your spouse the value of the part of the business that they would have got.

Of course, the above measures come with their own set of disadvantages. To know more about how finances are divided between spouses in divorce, I’d recommend you set up a business valuation and consult your lawyer before you file for divorce.

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