Dividing the Family Business in Divorce
If you’re contemplating divorce and have a family business, contact George Gelb today for a FREE consultation. He will answer all your questions and walk you through the process so you can determine the proper course of action for your best interests. (561) 748-8000
If you’re the owner of a business or the spouse of the owner of a business, and you are going through a divorce, you may be concerned about where the business will go to. Are you entitled to all the profits, or does your spouse get to share in them as well? Do you get to keep running the business, or will it have to be sold or liquidated?
These are very valid and important questions to answer. George Gelb has over 35 years of experience handling divorce cases of all kinds, and he is well versed in issues surrounding dividing the family business in divorce cases.
Step 1: Classification
First things first, the business must be classified as either separate property or marital property. Simply put, separate property is property that one spouse owned or inherited before marriage, and marital property is property that one or both spouses acquired during the marriage.
But it’s not always that cut and dried. Separate property can be anything that is designated as such in a prenuptial or postnuptial agreement. Separate property can also become marital property if it is commingled with marital property or if income from separate property is used to support the marriage.
Step 2: Valuation
The next step is to determine how much the business is worth. Sometimes an expert called a forensic accountant is called upon to examine the business and determine its value. Forensic accountants are often needed for couples with complex financial portfolios.
According to this Forbes article:
A forensic accountant is trained to examine personal and business financial records with an eye not only for what they show, but for what is being withheld.
Hiring a forensic CPA can be a costly and time-consuming process. It’s important, then, for both parties to weigh the cost of settlement against the cost of an in-depth examination into the business by a forensic accountant.
There are three main methods for valuing a business:
- Income-based approach: valuation is calculated by the net income of the business and the expected net income in the near future
- Asset-based approach: valuation is based on the total value of the assets, if sold in the open market. This approach is best if the business is being liquidated
- Market-based approach: valuation is calculated based on comparing similar businesses up for sale
If you’re the owner of a business, you’re going to want to devalue the business so that less of it goes to your spouse. That can be done through a few LEGAL, yet strategic channels: creative accounting, liquidating old, outdated inventory, and hiring more employees, among other things.
Conversely, if you are the spouse of the owner of a business, you want to be sure that your spouse is not withholding any financial information. You can do that by comparing the number of employees with gross revenue, subpoenaing records from major vendors, working at the business, and more. Your experienced attorney and/or a forensic accountant will help you look for any red flags that exist.