How Are Businesses Treated in a Divorce

You may be considering getting married soon. You may be the owner of a family business that you want to keep in the family. You may be married but unhappy in your marriage and you may be wondering what might happen to your business if the marriage were to end in divorce.

In today’s modern society where about half of all marriages end in divorce, these questions may be an important part of your business planning. You engage in tax planning, retirement planning, and succession planning, but divorce planning may also apply to your situation.

Thankfully, a divorce may not be a sure thing, and optimistically most marriages would last forever, but for better or for worse, some marriages do not. So what may become of the closely held or family business upon the end of a marriage?

In New York, the process of dividing assets and debts upon divorce is known as “equitable distribution.” The rules by which assets and debts are divided are provided through various state statutes and rules, as well as court precedent. The phrase “equitable distribution” is not particularly revealing as to what, in reality, may happen to a business upon divorce. The term “equitable” refers to New York’s approach of dividing up assets and debts according to what is fair rather than a mechanical approach, such as a pure 50/50 approach, which may be used in other states.

Very generally speaking, all assets and debts acquired during the marriage are considered “marital property” and are subject to being divided under New York’s “equitable distribution” laws. If a business was founded during a marriage using marital funds, it will likely be considered “marital property.” If the value of a business acquired before the marriage increases during the marriage, the increased value may be considered a marital asset.

For example, under New York’s equitable-distribution approach, in some circumstances it may be “fair” or “equitable” to equally divide various marital assets and debts. But in other situations “equity” or “fairness” may indicate that the business-owner spouse get more than half of the value of the business.

Ultimately, though, what you want to know is whether the business (or its value) will be divided, and how much money to which each spouse may be entitled. As you might expect, many cases settle without going to court. But ultimately, cases that do not settle go to before a New York State Supreme Court judge.

Whether a case is resolved through negotiations and settlement or through a trial before a judge, the outcome is typically based upon a variety of factors and on a step-by-step analysis.

 

Identify

Is there a business that is an asset? For example, where a spouse grows plants in a garden and sells them at a farmers’ market on a few weekends, there may not be a “business asset” that has value subject to being divided with the other spouse. In contrast, a farmer who grows and sells substantial amounts of produce to supermarkets clearly has a “business asset” that is subject to division. One way to look at this is whether the “business” could be sold to another as a going concern.

 

Classification

The next step is to classify whether the business is a marital asset subject to equitable distribution or whether the business is the “separate” property of the business-owner spouse.

For example, if a business was purchased during the marriage with funds the spouses earned during the marriage, then the business would be a “marital” asset subject to being divided. But what if the business was started and fully developed before the spouses were married? Then the value of the business that existed before the spouses were married would be considered “separate” property.

The process for differentiating between the pre-marital, “separate” portion and the marital portion may involve valuing the business as of the date the spouses got married, and on the date in which one of the spouses files for divorce. The difference between the two figures would be the “marital portion” of the business, whereas the value of the business as of the date the parties were married represents the pre-marital, “separate” portion. The pre-marital, “separate” portion of the asset would generally not be divided between the spouses, whereas the “marital” segment would likely be divided between the spouses.

 

Valuation

Equitable distribution requires that the value of the business be determined so that the spouses know what there actually is to be divided. In many ways, the process of valuing a business for a divorce is not much different than valuing the business for other purposes. The intention is to determine the fair market value of the marital portion of the business subject to equitable distribution. Often, this involves retaining an expert, an accountant with expertise in valuing businesses.

Sometimes, both parties agree on using one expert accountant, but both parties have the right to retain their own expert, which happens when the spouses cannot agree on one expert, or when one spouse disagrees with the valuation of one expert.

The expert, or experts, will use typical accounting methods to determine the value of a business, such as the “income approach,” the “market approach,” and/or the “asset approach.” Different methods may apply to different types of businesses. In valuing a business, the expert accountant might need other experts to value various components or business assets such as inventory, real estate, equipment, or machinery. At the very least, the valuation expert will need to review all of the business’s financial documentation to determine the value of the business.

 

Distribution

This term refers specifically to the process of determining what portion or percentage of the value of the business to which each spouse may be entitled. That explanation certainly oversimplifies how each spouse’s respective portions may be determined. New York’s equitable-distribution law sets forth about 14 specific factors for courts to consider in determining each spouse’s share upon divorce. Some of the factors include, for example:

 

§ How long the spouses were married, and their ages and health

§ The income, assets, and debts that each party had when they were first married 

§ Whether a spouse may lose pension rights or inheritance rights from the other spouse

§ Whether one spouse may have to pay maintenance (“alimony”) to the other,

§ The direct or indirect contributions of the “non-business owner” spouse to the business and to the family

§ The probable future financial circumstances of each party

 

            Substantial court precedent fleshes out how these and other factors are applied in various circumstances. These factors are then applied in guiding negotiations and may ultimately be applied by a judge if a case goes to trial.

            We hope this article provides you with some information that you find helpful, but please understand that is only a cursory introduction to the complicated issue of dealing with a business in a divorce.

 

David Tamber and Richard Alderman are attorneys with Alderman and Alderman in Syracuse. Contact them at (315) 422-8131 or email: dtamber@aldermanandalderman.com