America has millions of small businesses, family-owned businesses and closely-held businesses. Many thousands of these businesses reside in New Jersey, since it is the 11th most populated state in the country. Business valuation adds complexity to a divorce as compared to calculating income from W2 statements. The question always arises: in a divorce, how do we approach business valuation? (By the way, the terms “small,” “family-owned,” and “closely-held” may overlap when used to describe a business, but they are not completely synonymous.)
Business valuation in a divorce raises three main issues. Both spouses in a divorce should become aware of these issues. A potential recipient of support should have reasonable expectations just as much as the potential supporting spouse.
What is the business’s value?
A business’s value can be determined in many ways: future income, past income, assets, goodwill, etc. Multiple methods are frequently combined. The number of owners and whether all owners are family members – this is important too. Does the business have a market value? Is the business so identified with the owners that it can’t be sold to a neutral party? If so, does it matter? Is the business a manufacturing concern or a professional services business? This matters too. Determining the business’s value is the first step. But once you and your spouse agree on a value, with the usual assistance of a forensic accountant, the work is not over.
What is divided?
The second step is determining the value of the business your spouse will receive, if any. 50% is not assumed; any percentage is not assumed. Maybe the business is new, or the business preceded the marriage, or your spouse has never contributed to the business with labor or money or anything else. There is a big difference in being one of four (non-family) partners in a closely-held business versus being one of two partners in a husband-and-wife business. This leads to the last important issue…
No double-dipping allowed.
The general rule: Child support or alimony, if any, cannot be based on the value of the business distributed to the other spouse. If a spouse receives and distribution of part of the business’s value, that part of the business can’t also be counted for income generation. Of course, it depends on how the business is valued, because not all valuation methods consider past future income. Nonetheless, the general rule still holds.
I have intentionally not presented an exhaustive research project on business valuation and divorce. I will leave that to attorneys who write blog posts only for other attorneys! Valuing a business for divorce involves many interrelated concerns, and every situation is different. If you need to discuss your circumstances, please give me a call.