Distributing marital assets can be one of the most challenging and contentious aspects of a divorce. When it comes to dividing a family business, the stakes can be even higher. These days, many married entrepreneurs own their own businesses and these closely-held companies are often the most valuable asset in the marriage. If you are contemplating a dissolution of marriage and have a family business, here’s what you need to consider:
Determining Marital Assets
Most states, including Florida, determine how to divide property between spouses according to equitable (50/50) distribution principles. But before this can happen, a court must first determine if the business is a marital or non-marital asset. Under Florida law, all assets accumulated during a marriage, including a business formed or acquired, are considered “marital” assets, unless otherwise designated in a legal pre- or postnuptial agreement. If this is the case, then the business may be considered a “non-marital” asset.
This said– classifying a family business is not always cut and dry. Numerous variables come into play, such as when and by whom the business was established, the nature of the financing used to launch the business, the contributions that each party made to the business, the skills required to run the business, and the change in the value of the business over the course of the marriage. Even if established before a marriage, a business may not be considered separate property if the non-owner has contributed to the business or marital funds were co-mingled into the business. Conversely, even if a business that was inherited or received as a gift during a marriage may not be considered “marital” property. A court will ultimately consider all factors and decide based on the law.
Establishing Business Valuation for Asset Division in a Divorce
If a business is established as a marital asset, then the court must determine a valuation for the business, to be able to divide it appropriately. A financial expert like a CPA is often needed to value the business according to established practices, such as using asset, income or market approaches. This may involve examining cash flow, getting appraisals for real estate and/or other tangible assets, adjusting for liabilities, and in Florida, considering “business goodwill”. This is the non-tangible value that a business may have based on its unique advantages and reputation. This is distinct from “personal goodwill” which is not considered a marital asset.
In some cases, expert witnesses may be needed to testify about the value of a business and how the valuation was established. Once a judge has settled on the value of the business, the court moves on to equitably distributing the assets unless a reason has been established for an unequal division.
3 Ways a Family Business May be Divided in a Dissolution of Marriage
There are three common ways that a family business is typically divided in a divorce. One option is for the parties to sell the business and split the proceeds. This is especially effective for cases when neither spouse wishes to retain ownership of the business. However, finding a buyer is not always a quick or easy process, which can drag out the divorce process. But for some, this is still preferable.
Another option is for one spouse to buy out the other spouse’s share of the family business. This works great when one party has a strong desire to continue to own the business and the other wishes to get out of it. The caveat is that the party that wishes to own the business outright must have the funds to be able to acquire the business from the other spouse. If this is the case, then it is a great way for both parties to move on from the shared responsibilities of owning and operating the business and continue with their lives.
Finally, some couples may elect to jointly own and operate the business. In a contested divorce, this may not be a viable option and even in an amicable dissolution, it is typically not ideal. After all, the spouses involved sought a divorce due to the inability to maintain a personal relationship. Likely, some or all of these same issues would naturally carry over into a business relationship.
Protecting Your Interests in a Divorce
If you are considering a divorce, always do so with an experienced family law attorney at your side to protect your interests. Whether a business owner or not, dissolutions of marriages often carry life-long, life-changing consequences in the areas of finances, asset division, alimony, child custody, and more. The family lawyers at Parra Harris law provide many years of experience in divorce and other family law matters. We are fully bilingual and represent our clients with compassion. Contact us at (904) 900-1617or [email protected] for a free initial consultation.