Any married couple that owns, operates or manages a business whether with both spouses working or just one, whether with partners or not, are always worried as to what will happen both financially and with ownership if there is a divorce.
There are several parts to analyzing a business for divorce purposes and this blog will just touch on some basic concepts with the basic assumption that the business was started during the marriage and that there are no separate property issues.
1. If the business requires a licensed professional such as an attorney, CPA, stock broker, insurance broker then the business can only be owned by the licensed professional. If the business is a retail store then either party can own the business after the divorce is made final.
2. The value of the business will depend on many factors which will include at a minimum a basic review of the gross income, expenses, salaries, future obligations (rent), debt and net profits. At the core of the analysis is whether the business could be sold to another person and for what approximate price. If it is a "dying business" there may not be a sales value since there are no potential purchasers. If the business merely produces average compensation for the work performed there may not be value as a stranger could make the same money as an employee and not have to "buy" a business to earn the same compensation.
So for example a plumber who has one truck and a helper and after expenses earns $100,000 may not have a business with a sales value if a typical plumber could earn $100,000 as an employee. The reason is that nobody will pay to takeover the business so that they can earn the same income as if they worked as a plumber for someone else. However, if the owner of the business makes $175,000 and earns an extra $75,000 the business will have value because without the business the plumber's income would be less. Therefore, buying the business may allow the new owner to earn $75,000 more than if they were just a working plumber. How much more is of course the question.
3. If the business has much debt and many obligations that would have to be taken over that will reduce the value of the business because paying off the debt reduces profits.
4. If the business is the type that most of the income is generated by the current owner and the customers will only deal with the current owner or the work is so unique (like an artist or a musician) there may not be any value to the business because once that owner leaves the customers leave as well. This is the concept of a "key man". Some types of work are so much a part of a person's talent that the talent cannot be sold or transferred.
5. If there are other partners or shareholders in the business the value has to be adjusted to reflect the percentage of ownership. A further reduction of value may also take place due to the "lack of marketability" which means that it may not be easy to find a purchaser who is willing to come in and also be accepted by the other owners.
6. In divorce cases if the spouses cannot agree on the value of the business a forensic accountant is often utilized to review all of the financials and to review how similar businesses are sold and marketed. There may be a formula that is a multiple of sales or profit. If the parties cannot agree, the court can determine the value if there is proper expert testimony.
7. In divorce cases if the parties cannot agree on who will operate the business, assuming that they both want to and they each have the skills to do so, the questions will be more complex. In the end, if both parties are qualified and they cannot agree the court may order the business sold. However, in most cases this does not happen as there is almost aways a number that can be offered and accepted.
8. Rarely (but it can happen) have I had both parties continue to work and own a business together after a divorce, but there is no prohibition. Of course they should have a partnership/shareholder's agreement, because one day one of them may want to sell or be bought out of the business.
9. If an agreement is made for one person to buyout the spouse the next question will be how is payment made. Perhaps there is a trade off with other marital assets or an upfront lump sum payment or a payment over a period of time. Each of these methods has their advantages and disadvantages.
The sale or transfer of a business during a divorce is almost always a complicated transaction and it is essential to have an experienced matrimonial attorney who also understand the business complexities in addition to the essential matrimonial law.