Divorce is difficult for all parties. But when there's a family business involved, divorce can be a nightmare. Take a look at a couple of common questions:
Should the enterprise be sold? Selling the business makes it easier to allocate the assets owned by the couple. But that solution is not common, since it generally leaves one or both spouses looking for work. Economic reality may force ex-spouses to try to continue working together, although taking that path obviously has problems of its own.
What if a business has two locations? Perhaps each spouse simply take over control of one company and operate independently. That may seem like an adequate answer, but it's unlikely that the two locations have the same value. After an independent business valuation has been performed and accepted, one spouse or the other probably needs to receive a financial offset to equalize the division of assets.
Probably the most common solution is that one spouse will take over the business, buying out the interest of the other spouse. Again, this requires that the value of the company be established to the satisfaction of both parties ... and this is where complications frequently arise.
READ MORE: What 2017’s Economic Uncertainty May Mean for Your Business Valuation
Conflicting Interests
Obviously the purchaser-spouse wants the value of the business to be set low and the seller-spouse wants the value set high. Each spouse can hire their own expert witness to determine the value of the business and end up with two vastly different dollar figures, each reflecting the interests of their clients.
What then?
The courts can step in and decide the worth of the business. The most widely accepted and known standard of value is fair market value. It is referenced or specified in more divorce case law than any other standard.
Here are a few characteristics of fair market value:
- When applicable, it generally takes into account discounts for lack of marketability and lack of control.
- It generally doesn't include an owner's personal goodwill.
- It can encompass the tax consequences.
(In some states, equitable distribution rules may require that discounts, personal goodwill and tax consequences be ignored.)
READ MORE: 10 Times It’s Essential to Seek a Business Valuation
Numerous court cases have upheld the use of fair market value in divorce business valuations. Fair market value is the most preferred and well-defined starting point in a divorce case. From there, arguments and adjustments can be made to resolve the specific issues of the case and achieve an equitable distribution of assets.
If you are concerned about how a divorce will affect your family business, contact us for a personalized assessment. We have decades of experience in working with family businesses and conducting business valuations.
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