What Happens with a Business in a Divorce?
In many families, at least one spouse owns an interest in a business. One of the most challenging issues when it comes time to divorce is how to handle that business.
And one of the most common misconceptions of divorcing business owners is that the court won't stick its nose into your business.
While every case is unique, here are a few general things to consider if you are facing a divorce and at least one spouse owns piece of a business.
In most circumstances, if the business was started or acquired during the marriage, the business is marital property. In Colorado, marital property is divisible between spouses at the time of divorce. Typically, the spouse holding the business interest will be awarded the business, but he or she will have to “buy out” the other spouse by transferring one-half of the value of the business interest in cash or other assets.
Even if a spouse’s business interest was acquired prior the marriage, any increase in value of the business during the marriage is marital property. Appreciation in the value of a premarital business during the marriage is typically divided in half, because the law assumes that the non-business-owner spouse contributed in some way to the ability of the business-owner spouse to grow the business. For example, a spouse inhabiting the role of “homemaker” helps the other spouse have time, energy, and space to focus on building a business.
In order to divide the marital property portion of a business, the business must be valued. Whether dividing all of a business interest, or just its growth during a marriage, divorcing spouses are usually faced with valuing a business interest in dollars. (Selling the business or sharing ownership post-divorce are less common alternatives.) To value a business formally requires hiring a business valuation expert to investigate and provide an opinion on the fair market value of the business. If the business was owned prior to the marriage, a forensic accountant may also be needed to help determine the value of the business at the date the marriage began (in order to determine how much the business grew during the marriage).
Even a small business may have goodwill as an on-going business. Many business owners operate a business solely as a way to provide professional services, and the business entity itself may therefore not have any market value to third parties. But the business may have value to the owner in the form of an expected stream of future income. A court has discretion to divide any such marital value between the spouses, but it can also apply a “discount” if the owner likely could not sell the business, which can reduce the value substantially.
Avoiding a formal business valuation is possible in a cooperative setting, but both spouses should be cautious. Business valuations can be costly and time consuming. Divorcing spouses who are cooperative often want to simply agree to a business value, and many wish to assign no value at all to a business. The most important thing is careful identification and review by both spouses of all relevant business documents. In an important 2015 Colorado appeals case, an agreement between divorcing spouses concerning property division (including the value of Husband’s business interest) was dismantled and re-litigated long after the divorce, when the business was re-valued at almost $1.5 million more than the value agreed to initially. The appellate Court ruled that because Husband had not formally “disclosed” to Wife all the required business documents, the original agreement could not be enforced against Wife, and assets had to be re-divided. Therefore, make sure any agreements around business value are predicated on full compliance with the procedural rules regarding disclosure.
Guidance from a legal professional is all the more important when it comes to working through issues that crop up with a business in divorce. It's the "business" of both spouses to understand how the law treats this issue, so that they are properly planning for their future, are in compliance with the law, and so that any settlement put forth to the court will be approved.
John Hoelle is the co-founder of Conscious Family Law & Mediation, offering collaborative divorce mediation, or legal representation with strength and integrity, in metro Denver/Boulder, Colorado.
Disclaimer: Nothing in this article constitutes legal advice, nor creates an attorney-client relationship between the author and any individual. Every case is unique, and you should direct specific legal questions in your case to a licensed attorney.