By Divorce.com staff
Updated Aug 04, 2022
How Are Business Assets Divided in a Divorce?
No one enters into their marriage wanting it to end, but for couples who choose to go their separate ways, we’ve figured out a way to make the entire process less overwhelming. Going through a divorce is no easy feat, especially when a business is involved.
Marital assets need to be distributed evenly, and determining the value of a business and how to divide it between two people can be a difficult (and often lengthy) process.
Business assets aren’t always marital property (ex: when one spouse has an existing business before marriage in a non-community property state), but if yours are, keep reading.
How Are Businesses Valued in a Divorce?
There are a few different ways that businesses can be valued in the event of a divorce:
- Current Market Values
The income valuation is the most common and preferred way for appraisers to determine the value of a business.
With an income-based approach, the appraiser determines the value of the business based on its revenue. In the case of a divorce, this refers to what the company is anticipated to earn in the future. For this approach to be effective, the company has to be stable and have the ability to sustain itself over time. For a business to be sustainable, it must have regular cash flow.
An asset is defined as any part of a company that provides value in the form of revenue and stands to provide future value as well. Assets can be categorized in a few ways — how they are used by the business, whether they are considered intangible or tangible, and how easily they can be liquidated into cash.
- How do businesses use assets? Business assets are items a company owns, manufactures, or otherwise benefits from in some monetary way. They can be used to create cash flow, cut costs, or set a foundation for future sustainability and profitability.
- What are tangible properties? A tangible property is an asset that exists in physical form and has a value that depreciates over time, like a vehicle, for example.
- What are intangible properties? An intangible property is an asset that does not exist in physical form and has no recorded value, like a trademark or copyright, for example.
- What does it mean to liquidate assets? Asset liquidation is the process of selling non-liquid holdings on the market to obtain cash. Businesses often do this to pay off large debts owed to creditors.
Business assets are a key indicator of overall worth and, therefore, a primary factor in determining the value of a business.
A liability is an unpaid debt owed by a company, such as a mortgage balance or past due bills. Liabilities can be factored into valuations when the appraiser takes the amount it will take to eliminate the outstanding debt and subtracts it from the value of the other assets.
Other liabilities include lines of credit and recurring costs that are not easy to eliminate on a whim, such as building rent or loan payments.
This approach is best for businesses that are likely to be sold soon. In this case, the company would be valued just like any other real estate property would be. Here’s how it works.
- The appraiser analyzes the business. First, they will take a look at the business as a whole in order to begin estimating its worth.
- Profitability is determined. For a business to be comparable to others that have recently been sold on the market, the appraiser has to determine its profitability. To determine profitability, the appraiser must have access to recent sales data and a list of companies in the same niche that are in close geographical proximity and bring in a similar income to the business in question.
- The business is compared to other similar ones that were recently sold. With access to the proper information, the appraiser can then compare the businesses to determine how the company in question might perform on the market if it were to go up for sale.
This market approach is very tricky to execute, and appraisers often avoid this option due to the difficulty of gathering data from several businesses at once. The information can be hard to find or sometimes not available at all.
How Are Business Assets Divided During a Divorce?
For business assets to be divided during a divorce, they must be deemed as marital assets instead of individual property. When a business is determined to be marital property, its assets will be distributed accordingly. The distribution also varies according to individual state laws.
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What Is Equitable Distribution?
Equitable distribution is a kind of divorce law that dictates marital property division to be equitable. Equitable doesn’t necessarily mean equal (although it can); it means that the assets will be divided fairly. This could mean a former spouse is given an 80% share of the business based on their contributions.
What Factors Are Considered In Equitable Distribution?
Several factors are considered when determining how business assets should be divided equitably, such as how much each spouse contributed financially to the company and how long they’ve been married.
If one spouse invested more funds into the business than the other, they would hold more equity and likely be awarded a larger stake in the business unless both parties agree otherwise.
In states that follow the equitable distribution theory, spouses are allowed to handle the division of assets on their own if they are able to come to a mutual agreement.
Where Is Equitable Distribution Used?
Equitable distribution states are the most common type in the United States. The states that follow this practice include the following.
- Alabama, Arkansas, Colorado, Connecticut, Washington D.C., Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wyoming.
The few states that don’t follow equitable distribution are either community property states or states that allow spouses to decide on their own if they want to follow community property laws.
What Is Community Property?
Community property is a property that is owned by a married couple. In states that follow community property laws, family business assets are treated like any other marital asset and therefore divided evenly.
Where Is Community Property Used?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are all community property states. This means couples who get a divorce in any of these states will each get a 50/50 portion of the business, no matter how much either of them contributed.
It also means that a spouse who established a business on their own prior to being married would have to split its assets in the event of a divorce unless a prenuptial agreement was on the table stating otherwise.
Alaska, South Dakota, and Tennessee allow the couple to decide on their own if they want to follow community property laws or not.
3 Common Methods of Dividing a Business In a Divorce
There are a few different ways that business assets can be divided during a divorce. Here are some examples.
- Buyout. In this case, the spouse that can afford to do so would purchase the business shares of the other and become the sole owner. This is a good option for a situation where one spouse isn’t very interested in continuing to be a part of the company after the divorce.
- Co-ownership. Ex-couples can also decide to continue running their business as a unit. This is great for situations that end mutually and without spite. Separations can be amicable, and couples often continue successfully running their companies together even after deciding to go their separate ways.
- Sell the business. A third option is to sell. Depending on the market, selling a company could be a smart financial move. A couple might not want to continue running a business together when they’re no longer in a relationship. If both agree, they can sell, split the funds, and go their separate ways.
The division of assets can be a complicated and stressful process, but it doesn’t have to be. We’ve figured out a way to make divorce proceedings quick, simple, and affordable for our customers.
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