How is a Family Business Valued and Divided in Divorce?

If you or your spouse owns a business and you decide to part ways, you might be wondering “how is a business valued in a divorce?” Often, a business is the most valuable asset a couple owns. While you may have spent years, or even decades, growing your company, dividing it can be a very contentious issue during divorce proceedings. Whether you are using mediation, the collaborative process, or your case must be litigated, ensuring that your business is properly valued is crucial to achieving a fair division of property between spouses.

When is a Business Divided in Divorce?

A business is subject to division in divorce if it is considered marital property. Unless a valid prenup or postnup was signed characterizing it as separate property, a business will generally be classified as marital property if it was formed during the course of the marriage. It does not matter which spouse’s name the business is in if the company was formed while the spouses were married in order for the asset to be characterized as marital property.

In the event the business was opened before the marriage, some or all of it could be classified as non-marital property, which is usually not subject to division in divorce. However, division can become more complex if marital and separate assets are commingled. If a spouse started the company before the marriage — and marital funds were used to increase its value — the portion of the business that increased in value would likely be subject to division. And the question is whether marital effort was part of increasing the value during the marriage. In Minnesota, who works on what aspect of assets during the marriage does not dictate who is awarded the asset in a divorce. Talk to an attorney to discuss whether there is a marital interest in a business.

How are Businesses Divided in Divorce?

Minnesota applies the doctrine of equitable distribution when it comes to dividing marital property in divorce. This doesn’t always mean that property will be divided equally, but rather, in a way that is deemed fair. A court will consider a number of factors to determine a fair division of property, including the length of the marriage, employability of the spouses, the age and health of the spouses, and the income of each party. The statute also specifies that a judge should consider each spouse’s contribution in the acquisition, preservation, depreciation, or appreciation in the amount or value of the marital property.

Importantly, when spouses use the collaborative divorce process, they can divide their marital property, including their business assets, in a way that they think is fair. If spouses leave the matter up to a judge to decide, the same outcome might not be reached. For business owners, the collaborative process can provide flexibility and allow for creativity when it comes to how a business is valued in divorce and the method used for valuation. There are professionals that can be hired to help determine that value of a business and the parties can agree on how deep an analysis they want to do to arrive at a value.

Common Solutions for Dividing a Business in Divorce

What happens to a business in divorce can depend upon whether spouses are amicable and what their goals are for the company. For example, if the company is owned by both spouses, they may continue running the company together after the divorce has been finalized. Or, they might decide to sell it and start their own separate companies or award it to one of the parties with payment to the other person.

Some of the most common solutions for achieving an equitable division of a business in divorce can include the following:

• One spouse buys the other out
• One spouse keeps the business and the company’s value is offset with other assets
• One spouse pays off the other spouse over an extended period of time
• The spouses continue to work together in a business partnership
• The business is sold and the spouses split the proceeds

While spouses may agree on an amount that the company is worth, a business is a complex asset — and the value may either fluctuate or not be known. Before spouses decide how they will divide their business, it is often crucial to obtain a business valuation, depending on the business.

How is a Business Valued in a Divorce?

Minnesota uses the “fair market value” approach when determining how a business is valued in divorce. This is defined as the price at which a willing buyer and a willing seller would agree to carry out the transaction on the open market — with both parties having reasonable knowledge of the facts. There are several different valuation methods that can be used in a business valuation, including the income approach, the market approach, and the asset-based approach.

The income approach evaluates the cash flow a company generates from its operations over a specific period of time. This is different from the asset approach, which determines the value of the business based on the value of its assets. In addition, the market approach places a value on the business by comparing the historic sales of similar businesses. The valuation method used can depend upon the type of business, how long it has been operating, and other factors.

There are many components when it comes to valuing a business. Not only are the company’s assets, liabilities, and cash flow considered, but business assets can also include intangible assets. For instance, things like goodwill, reputation, and intellectual property all have value. A business valuation should also consider the company’s projected future revenue and expenses. A business valuation expert can work with your attorney, or as part of your collaborative team, to ensure an accurate and comprehensive valuation.

Contact an Experienced Minnesota Divorce Attorney

Business owners may face unique considerations when it comes to dividing business assets during divorce proceedings — and it’s important to understand how a business is valued in divorce. By using the collaborative divorce process, you can work to reach creative solutions that are beneficial to both parties and your business. Divorce and family law attorney Louise Livesay has been dedicated to helping clients who own businesses in the Twin Cities area resolve their divorce cases respectfully and peacefully for more than two decades using alternative dispute resolution methods such as the collaborative process. We welcome you to contact us online for a consultation or by calling 651-294-2338.