In our last post, we began discussing the topic of business valuation and how business owners can protect their business assets with a prenuptial agreement. Short of having an effective prenuptial agreement, business assets are divided according to the principles of state law.
When business assets are part of the picture during divorce, things can get somewhat complicated when it comes to division. Although there are a variety of potentially sticky circumstances that can arise, we'd like to look briefly at two particular ones which we have highlighted on our firmsite, and some of the issues that can come up in these cases.
The first issue pertains to the division of business assets when the business was started during the marriage. One of the issues here, of course, is who is willing and able to continue on with the business after divorce. In some cases, there is only one party who can continue on with the business. Where both parties wish to continue with the business, a decision needs to be made as to who will ultimately be awarded control the business.
In either case, the court needs to determine how much compensation the party not continuing with the business should receive for their interest in the business, and this is where an accurate valuation is critical. In determining the value of the business, it is important to work with an experienced attorney who can help ensure the accuracy of business valuation, particularly with respect to company goodwill.
The second issue we'd like to highlight is the division of assets from a business started prior to marriage, but which increased in value during the marriage. This is an area of law that can become particularly complicated because of the precarious state of the law.
Generally, businesses started before divorce are considered to be separate property, but an increase in the value of the business can be considered community property and thus be subject to division. Unfortunately, because state law is not settled on the issue of exactly how much of such a business' increase in value is subject to division in divorce, it is important to work with an attorney who understands the case law on the issue and who can work to represent one's interests.
Source: The Lane Report, "Business valuation is science and art," Greg Paeth, Oct. 16, 2014.