Going through a divorce can be challenging for many individuals, but when a business is involved, it adds an additional layer of complexity. As a business owner, you face unique challenges in dividing your assets, protecting your interests, and ensuring that the business is valued and divided fairly. Understanding how business ownership and assets are treated in divorce proceedings is crucial to ensuring a fair and equitable outcome for both parties.

In this blog, we’ll explore how to handle business assets in a divorce, the critical role business valuation professionals play in the process, and what steps you can take to ensure a fair division.

The Role of Business Valuation in Divorce

When you are going through a divorce and have a business involved, one of the first steps in the process is determining the value of your business. Business valuation is a highly specialized field, and it typically requires the knowledge of a business valuation professional. These professionals have the skills and knowledge to assess the worth of your business based on a variety of factors, including business revenue, tangible and intangible assets, and goodwill.

Valuation professionals use a number of techniques to determine the business’s value. Their job is to look beyond just the numbers—like revenue or profit—and assess the overall financial health and potential of the business. They will consider everything from the business’s financial statements to its customer base and intellectual property.

The goal of this valuation process is to determine the true value of your business. This value is essential for dividing assets during the divorce settlement. Whether your business has significant value or is largely dependent on your personal goodwill, this professional analysis serves as the foundation for dividing the business fairly.

What is Goodwill and Why Does It Matter?

One of the most important aspects of business valuation in a divorce is the concept of goodwill. Goodwill is an intangible asset that refers to the reputation, customer loyalty, and brand recognition of the business. It represents the value the business has built over time due to its relationship with clients, customers, or the community.

There are two primary types of goodwill that play a role in business valuation: personal goodwill and market goodwill.

• Personal goodwill is tied directly to the business owner’s skills, reputation, and personal involvement. For example, a lawyer’s law firm or a consultant’s practice may have significant personal goodwill tied directly to the owner’s personal reputation. This kind of goodwill is often linked to the business owner’s knowledge, relationships, and knowledge.

• Market goodwill, on the other hand, refers to the value of a business that can continue even if the owner leaves. This kind of goodwill is independent of the owner’s personal involvement and is often found in businesses that have a strong brand, intellectual property, or a well-established customer base. Franchises, companies with intellectual property, and businesses with multiple employees often have substantial market goodwill.

Understanding whether your business is primarily based on personal or market goodwill is critical for determining how it will be treated in the divorce proceedings. Businesses relying on personal goodwill may be valued very differently from those that rely on market goodwill.

Separate vs. Community Property: Why It Matters

One of the key distinctions in divorce is whether the business is considered separate or community property. This classification plays a critical role in how business assets will be divided between the spouses.

• Separate property refers to assets acquired before marriage or by gift or inheritance. If you started your business before marriage, it is likely classified as separate property and will generally not be divided during divorce.

• Community property, however, includes assets acquired during the marriage. If the business was started during the marriage, it is considered community property, and it will be divided between the spouses. Even if one spouse was not directly involved in running the business, they may still be entitled to a portion of its value.

The court will consider both spouses’ contributions when dividing business assets. This is true even if one spouse was not actively involved in the business day-to-day operations. If the business was started during the marriage, the non-owner spouse is likely entitled to a share of the business’s value. This means that both spouses must share in the business’s financial success, regardless of whether one of them was more involved in its operations.

What Happens if the Business Has No Marketable Value?

In some cases, businesses may have little or no marketable value. This situation is particularly common with businesses that rely heavily on the personal involvement of the business owner. For example, if a consultant, doctor, or attorney’s practice is built entirely on the owner’s personal skills, reputation, and client relationships, the business may have little or no value once the owner leaves.

In such cases, the business may be deemed worthless in financial terms. However, even if the business has no market value, it still needs to be addressed in the divorce settlement. The court will typically assign the business to the spouse who owns it, but no financial exchange will take place. This must be clearly stated in the divorce settlement to avoid any misunderstandings or potential disputes in the future.

If the business is based solely on personal goodwill and has no extrinsic value, the division of assets may be simplified, as there will be no need to divide the business itself. However, the value (or lack thereof) must still be addressed in the overall settlement to ensure both spouses understand the financial outcome.

Dividing Business Assets: Possible Outcomes

Once the business’s value is determined, there are several ways to handle its division during the divorce proceedings. The most common options include:

1. Selling the Business: In some cases, the business may be sold, and the proceeds are divided between the spouses. This option is typically used when the business has significant value, and both spouses are in agreement on the sale. The proceeds can then be split in a way that is mutually acceptable to both parties.

2. Buying Out the Other Spouse’s Share: Alternatively, one spouse may choose to buy out the other spouse’s share of the business. This allows the business owner to retain full ownership and control over the business, while compensating the other spouse with a lump sum or other assets in exchange for their share.

3. Assigning the Business to One Spouse: If the business has no market value, the court may assign the business to the spouse who owns it, with no financial exchange. The non-owner spouse may receive other assets, such as real estate or investments, to compensate for the lack of business value.

Each option depends on the business’s value and the spouses’ preferences for how to proceed. Negotiating these terms can be difficult, so it’s crucial to have the guidance of a legal professional who understands business division in divorce.

Why a Professional Valuation is Crucial

A proper business valuation is essential in ensuring that the division of assets is fair and equitable. Without an accurate valuation, there is a risk that one spouse may receive more or less than they are entitled to in the divorce settlement.

Business valuation professionals bring critical insight to the process by offering an unbiased, thorough evaluation of the business. They take into account all assets, liabilities, and goodwill that may affect the business’s value. Without their knowledge, there’s a significant risk that one spouse might receive less than they are entitled to, which could lead to future legal disputes.

For business owners, a proper valuation ensures that they are not unfairly disadvantaged during the division of assets. It also helps avoid future complications if the valuation is contested or found to be inaccurate.

Next Steps

For business owners, understanding how to handle business assets in a divorce is crucial. Whether your business has market value or relies on personal goodwill, a professional valuation professional can help ensure a fair and equitable division. Whether you plan to sell the business, buy out your spouse’s share, or retain ownership, a business valuation professional will provide you with the insights you need to make informed decisions.