The division of property is often a contentious aspect of any divorce, but it can be even more complex when there is a business involved. No matter who has ownership or a stake in the company, it must be appraised and valued during the division of property. The valuation of a business can severely impact the outcome of a separation settlement.
Marital and Separate Property in Equitable Distribution States
In most states in the Midwest, the division of property during a divorce is done through equitable distribution. This means that assets are split fairly, but not necessarily equally, between spouses. In equitable distribution states, most property and assets a spouse gains during a marriage are considered marital property.
Assets gained prior to marriage are considered separate property and not up for division. However, separate assets can become marital assets if a spouse contributes to payments on the assets or if the assets are commingled.
If one spouse owns a business, all or some of their stake in the company may be marital property, depending on when the business was acquired and how its value has appreciated:
- A business gained during a marriage, and acquired with marital assets, is likely going to be wholly marital property.
- A business acquired during a marriage through separate assets could be considered separate property if the owner can prove that no marital assets were used to grow or continue the business.
- A business acquired prior to marriage is likely to be separate property unless a spouse can prove that they contributed to its financial success or that marital assets were used in its upkeep.
Why Is Business Valuation Necessary?
Whether a business is marital or separate property, valuation is essential. Asset division ensures that each spouse receives an equitable amount of marital assets. An incorrect business valuation will mean that both spouses will receive an unfair portion of assets.
Methods of Business Valuation
If there is a business involved in your divorce, it’s important to have a professional appraise its value. This will ensure it’s done correctly and by a third party. A professional business valuation is commonly done in one of three ways:
- Income-Based: This method values the business based on its generative income and earnings. This is an easier valuation method, but it may be inaccurate if there isn’t enough past financial data or the business has large amounts of debt.
- Market-Based: This method determines the fair market value of the business compared to the sales of similar companies. This is more likely to be accurate in areas of business with clear and common market sales.
- Asset-Based: This method values a business based on the value of all its assets, minus any debts or liabilities. This type of valuation fails to account for future potential earnings.
Generally, the most accurate business valuation combines several different ways of appraising a business.
How Could a Business Be Divided in a Divorce?
If a property is considered to be partially or fully marital property, then spouses need to divide it between them. During a divorce, if spouses are amicable, they may use the value of the business to determine a fair asset division. This could be done in several ways, including:
- Buyout: One spouse buys all the shares the other spouse has in the business.
- Sale: The business is sold for its value, which is split equitably between the spouses.
- Joint Ownership: One spouse maintains ownership of the business and makes regular payments to their spouse that are equal to that spouse’s original share or investment in the business.
If spouses can’t come to an agreement, or can’t agree on the value of the business, their divorce will go to court. Litigation may cover the entire divorce or only the division of property. The court will consider:
- Each spouse’s wishes for the business
- Expert testimony
- Relevant financial information
When determining whether a business is marital or separate property, and how much each spouse receives in division, the court will look at factors such as:
- When the spouses were married and when the business was acquired or started
- Each spouse’s income and resources
- Whether marital or separate funds were used in the business
- The value of the business
- Each spouse’s contributions to the business
The court will then use these factors to determine an equitable split of the business and any other marital property. It’s useful to have an attorney advocate for your business interests in court.
Q: Is a Business Marital Property?
A: A business may be marital property if it was acquired during a marriage. It also depends on several other factors, such as:
- The contributions of each spouse to the business
- Whether marital or separate assets were used to acquire the business
- If the appreciation of the business was the result of both spouses’ involvement
Q: Can I Lose Half of My Business in a Divorce?
A: This depends on how involved a spouse is in the business. If you acquired your business prior to marriage, and continued to finance it with separate assets, it will likely not be up for division during divorce. If it was acquired during your marriage, or financed with marital assets, it will likely be considered marital property, and your spouse may receive an equitable portion of the business.
Q: Do I Own Part of My Husband’s Business?
A: If the business was acquired during your marriage, with the use of marital assets, then it may be considered marital property that is to be divided during divorce. How much of a spouse’s business you own depends on your financial contributions. A business is likely considered separate property if it was acquired and financed with separate assets.
Q: How Are Assets Split in Divorce?
A: This depends on the laws of your state. For example, Missouri law mandates an equitable distribution of assets during divorce. This means that almost all assets acquired during a marriage are considered marital assets. Marital assets are then divided between spouses equitably, but not equally. What is considered fair division depends on factors such as:
- Each spouse’s income
- Their contributions to the marriage
- How each spouse conducted themselves in the marriage
Contact an Experienced Divorce and Business Valuation Attorney
When you are divorced and have large assets, like a business, it is in your interests to work with a qualified attorney to ensure your rights are represented. Contact Stange Law Firm to see how we can protect your business interests.