Understanding the Fight Over the Family Business in Divorce

Husband and Wife start a business. (Or, Husband starts a business during the marriage. Or Wife starts a business during the marriage.)

Over time, the business becomes the couple’s primary (or sole) income.

Husband and Wife separate and plan to divorce. Now, what about the business?

Depending on the dynamics, there may be more than one issue here.

The first potential issue is: going forward, who will operate and own the business. In many cases, where only one spouse actually ran the business in the first place, this issue is likely easily dealt with.

In others, where both spouses actually worked side-by-side in the business, this issue may be hotly contested. The outcome may turn upon what each spouse contributed functionally to the business and who will be most able to continue the business independently of the other spouse.

But alternative outcomes are possible, generally for reasons related to the second issue.

The second issue is how to compensate the spouse who will no longer be involved in the business, that is, valuation of the business for purposes of establishing a buyout value.

Large publicly traded companies are actually far easier to value than very small closely held companies. There are more variables that may more profoundly impact the valuation.

There are more than a few ways to go about valuing a business. Each has its strengths and weaknesses. Oftentimes, the result of several different approaches is considered in arriving at THE ultimate valuation.

The most accurate and reliable valuation is what a bona fide arms-length third party would pay for the business. And, if the parties cannot agree or put forth a compelling appraisal, the ultimate outcome may require exactly such a sale.

That is precisely the scenario under which various items of marital property are sold to third parties in some divorce cases and the proceeds divided between the spouses.

But ready, willing and able buyers generally only come forward for property that has a relatively readily ascertainable value.

Unfortunately, though, the reality is that small businesses often have far less value to a newcomer unacquainted with the particulars of the business than to the person or persons who conceived of it and built it from the ground up and know all of its ins and outs.

For all of the above reasons, business valuations can be complex and expensive and, ultimately, elusive. But if the parties cannot agree on a buyout value for the business, a professionally prepared business valuation may be the only way for the court to determine the business’ value.

In light of the expense involved, another option to consider may be an alimony arrangement as an alternative to division of the business. Or better yet, a combination of the two.

But, when considering such alternatives, it is critical to be aware that business performance can change over time (for the better or for the worse) due to changes in the market, the economy and even the change in operators. And the spouse accepting an alternative payout over time may ultimately receive less than they were entitled to.

Read more in this eCommerceBytes article: Four Things Online Sellers Should Know About Business Appraisals.