Dividing A Family Owned Business In A Divorce

The situation is more complicated if both wife and husband have been actively involved in the business. The court may set up an arrangement by which one spouse has the right to buy out the other spouse over time. Alternatively, the right to buy out the other could be sequential-first given to one spouse for a certain period of time, then to the other spouse for the same period of time. As with handling the family home division, a forced sale might be an option if neither party can buy out the other party (although most courts would favor giving the business to just one spouse rather than dissolving an ongoing business). 

If the court thinks the parties can continue to work together despite the divorce, the court may continue the status quo with the husband and wife remaining as business partners, even though they are no longer marital partners. 

The valuation of family businesses can be tricky. A closely-held business does not have a value that can be readily ascertained on a stock exchange. If the business is of sufficient size, it could be worth the parties’ efforts to hire experts such as accountants to evaluate the business, assuming the business’s value is disputed or uncertain. On the other hand, if the business is tiny or clearly does not have a significant positive value, it will probably not be worth the time and money to evaluate it thoroughly. 

When trying to ascertain the value of a business, it is helpful to look at the business’s financial statements, reflecting the business’s assets, liabilities, income, and expenses. Tax returns and checking account records also can provide valuable information-sometimes more accurate than the company’s internal financial statements. 

Loan applications of the business (or of the business owner) may provide precious information. Businesses and individuals may make “generous” statements about income and assets when seeking a loan. That can be useful for obtaining a loan. It is also handy to the business owner’s spouse when the spouse wants to show that it is worth more than the business owner claims when divorce is at issue. 

If there has been a recent good faith offer to buy the business, that, of course, is valuable evidence about the value of the business. Also, if there is information about the purchase price of similar businesses, that is useful. 

Businesses whose customers usually pay in cash can be tough to value, especially if the owner tries to hide income. If the stated income of the business owner does not match the amount of money the parties have been spending over the past few years, proof of the party’s expenses compared with declared income can create an inference to the court that the business is worth more than the owner says it is. 

Another source of information about a closely held business may be a disgruntled former (or current)employee. An employee unhappy with the boss may be willing to pass on information about how much money is made and the expenses. 

If the spouse who is not the business owner presents proof about hidden income or inflated expenses, that can be the basis for a greater award of other property and perhaps higher alimony and child support. When seeking to claim that income is higher than what the other party says it is, one needs to be alert for other explanations for the added funds. If the business owner has been meeting family expenses with loans that have to be repaid, the funds from those loans would not be a basis for a larger award of property, alimony, or child support to the other spouse. Instead, the other spouse may receive a lesser amount of property, alimony, and child support since the business owner is likely to be saddled with the debt that needs to be repaid. 

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