When a prenuptial / postnuptial agreement doesn't dictate what should happen to a family business in the event of a divorce, it is up to the divorcing parties - or the court - to decide what to do with the business and its assets.
Closing up shop and dividing business assets/debts is one option that spouses can consider. We will discuss this option in our next blog post. But what if one spouse wants to continue to operate the business? What should the other spouse receive? How does business valuation in divorce work?
The first step is to determine if both spouses can agree on whether the business should stay intact. In some contentious divorces, businesses must be dissolved because the parties cannot reach an agreement. If the spouses can reach an initial agreement to keep the business running, then they must determine how much the business is worth.
Divorcing with a small business is often challenging because a business isn't like other community property. The value of a business is not just what is in the books and is rarely determined by the business value listed in the buy/sell agreement. There are tangible assets such as commercial property, furniture and bank accounts, but there are also assets whose values are less tangible, such as mortgages, labor, intellectual property and the business' reputation. Determining reasonable compensation for the spouse who will not keep the business is, thus, difficult, especially when the other spouse will continue to receive the benefits of the business after the divorce.
Your divorce lawyer will work with business valuation experts (such as a CPA / business appraiser) to determine all of the business' assets and debts. You may be asked to compile your books, tax returns and other financial documents. A business appraiser can also determine, based on your earnings and other information, the goodwill of the business (the ability of your business to maintain and attract customers).
You and your spouse may both have a business appraisal done. Most likely, the appraisals will be different and you may need to work with your divorce attorneys to agree on an appropriate business value.
Sometimes, business valuation leads to a property division agreement that the spouse who would like to continue to operate the business simply cannot pay. In these cases, the divorce decree should lay out how the business owner can make future payments to the other spouse, including all the specifics of that payment. Keep in mind that, unlike support orders, you will not be able to modify the amount owed.
Source: Forbes, "Minding Your (Own) Business in Divorce," Marlene M. Browne, Dec. 12, 2006.