Part of the divorce process is dividing the many assets and debts the husband and wife accumulated during their marriage through a method called equitable distribution of marital property. The court will determine whether the property is marital or separate (or part-marital and part-separate), and value the property using an acceptable valuation method. After valuing marital property, the court will divide the value between spouses according to the laws of equitable distribution.
Some assets are easily valued and distributed, such as a bank account. Others are more difficult, such as a pension or authentic piece of art. Perhaps the most complex, however, is a business interest.
Is the Business Marital Property or Separate Property?
Marital property is generally anything that was acquired by either party, regardless of title, during the marriage and not by inheritance or gift from a third party. Separate property is anything that was acquired before the marriage or property that is directly traceable to separate property.
If you or your spouse started a business during your marriage and used marital funds, then it is clearly marital and the entire value will be subject to equitable distribution. Classification of your business as marital or separate becomes more difficult if it was started before the marriage. If you formed the business prior to the marriage using your separate funds, then it will at least have started out as your separate property.
It is important to note, however, that just because you formed a business prior to the marriage through the use of separate funds, and thus it started out as your separate property, that does not mean it is excluded entirely from the marital pie. There are many instances where a business is started before marriage, but a portion of the value becomes marital. For example, if you invested marital funds in the business, or you or your spouse used personal efforts to increase the business value during the marriage, then at least a portion of the business will be considered marital property and subject to equitable distribution in a divorce.
How much is the business interest worth?
Classifying the business as separate or marital property is only the tip of the iceberg. The marital portion of the business must then be valued using an acceptable valuation method.
One of the major problems with valuing a business is that it can be very expensive. Consequently, if you and your spouse can agree that the business has minimal value, then you may be able to just agree on an amount and get on with things. If, however, your business has significant value, then it will probably result in a “battle of experts,” where you both hire someone experienced in business valuation to review relevant documents, talk to key people, and come up with a number for the value.
There are several approaches to coming up with a business value. The “asset approach” uses a simple formula: assets minus liabilities = value. Assets include tangible assets, such as furniture, computers, or inventory, and intangible assets, such as accounts receivable, patents, or trade secrets.
The “market approach” calculates the value of a business by comparing it to similar businesses that have been sold. This approach is similar to how real estate appraisers look at comparable sales in valuing a home.
The “income approach” uses historical figures and particular formulas to predict expected cash flow and profits in calculating the value of a business. The formulas used consider future benefits as well as the rate of risk or return.
Due to the imprecise nature of determining value using any of the foregoing methods, business valuations can vary wildly depending on who conducts the valuation. Early investigation into a business asset in divorce can mean the difference of tens of thousands of dollars to your case, if not more. It is crucial to get the opinion of an experienced divorce attorney if it looks like there will be a business valuation in your divorce.
How is the business value divided?
The final step in equitable distribution of a business asset is to divide the value. No, the court is not going to make you sell your business, or hire your spouse, or anything crazy like that. But the court will make you fairly divide the value of your marital interest in the business by trading it for other marital assets or giving your spouse a monetary award (i.e. a cash payment).
Contact a Wayside Legal LLC Divorce Attorney
Wayside Legal LLC is an award-winning law firm located in North Bethesda, Maryland, with years of experience handling divorce proceedings throughout Maryland, D.C., and Virginia. If you are facing a separation and divorce from your spouse, contact a Wayside Legal attorney today for a consultation to discuss your specific situation