Article on Three Options for a Private Business in a Divorce

Justin T. Miller recently published an Article entitled, Three Options for a Private Business in a Divorce, Probate and Property Magazine, Vol. 33 No. 2, March/April 2019. Provided below is the introduction to the Article.

As part of the marital dissolution process, spouses generally need to identify, value, and divide assets. For certain types of property, such as bank accounts, the process is fairly simple. But what do you do if the spouses have an ownership interest in a private business?

The first determination that must be made with respect to a private business in a divorce is whether the business interest is considered a marital asset or separate property. That determination depends upon whether the interest was owned prior to the date of marriage, the source of funds used to acquire the business, and the extent of financial contributions and personal efforts contributed to the business by either spouse during the marriage. Moreover, the analysis of marital versus separate property differs from state to state.

Next, the business interest needs to be valued. Although it is theoretically possible that both spouses may agree on value, the valuation of a business interest often is a major source of disagreement in a divorce. Because private businesses are not publicly traded on a public stock exchange such as NASDAQ or the New York Stock Exchange, ascertaining the value of a business can be a complex process. There generally are three approaches to determining the fair market value of a business interest, including as asset approach, a market approach, and an income approach. These approaches may exclude some discounts that are not appropriate in a divorce context. In most cases where a business interest has significant value, it will be necessary for one or more independent qualified valuation professionals - such as an Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), or Certified Public Accountant (CPA) with an Accredited in Business Valuation (ABV) designation - to be engaged as part of the marital dissolution process to help determine the appropriate fair market value of the business interest. Often, each spouse will hire his or her own expert. If the spouses end up in litigation, then a judge will be required to determine which expert has a more credible valuation, which could be substantially more time-consuming and expensive than compromising with a settlement.

After the business interest has been valued, the spouses then need to determine what should happen to the business interests after the marriage has been dissolved. In general, the three options for addressing private business interests in divorce include: (1) one spouse buying out the other spouse; (2) selling the business; (3) remaining co-owners.