Divorce & Business Valuation in Florida
Getting divorced can be challenging, especially if you are a business owner. Your day-to-day operations may be impacted as you have to schedule court appearances or mediation sessions and meetings with your attorney. You and your spouse may both work at the business, which can cause tension, and you may worry that your spouse is entitled to half of the business you (or your family) created. Below, we will discuss how property is divided and the importance of a business valuation during a divorce.
Is Your Business Marital or Separate Property?
During your divorce, your property will be classified as separate or marital property. Separate property includes property you obtained before your marriage, while marital property is anything obtained or accumulated during your union.
For example, John starts a moving company. A few years later, he marries Jane. In this scenario, his business would be considered separate property if they were to divorce. On the other hand, if John started his business after their marriage, the moving company would be considered marital property.
Certain assets (such as inheritance or personal injury claim compensation) can be excluded from your marital property. It is also important to note that your business can be classified as marital property even if you started and obtained the business before your marriage. A business—that typically would be separate property—can be categorized as marital property if:
- The non-owner spouse contributed to the business’ growth or maintenance.
- The money from the business benefited the marriage.
- The business income or assets are commingled with other marital property.
Let’s use our previous example with John and Jane. When John started the business, he was not married. On their wedding day, the business was only worth $120,000. During their marriage, Jane become the business’ accountant and secretary, and the business’ value increased to $200,000. Jane can argue that the business is marital property and/or that she is owed $80,000 or a business share equal to that total because of her contributions.
The moving company can also be considered marital property if John uses marital property (like a joint savings account) to help maintain the business as this is considered commingling. To protect your business (in the event of a divorce), you should avoid commingling and consult with an experienced attorney.
Business Valuation in Divorce Cases
Whether the business is separate or marital property, the business must be properly valued so that the court (and each party) has a clear financial picture of the involved assets. If the division of property is left up to the courts, the property is divided fairly rather than equally, and they will consider the value of each spouse’s non-marital, the value of marital assets, and each party’s financial situation (as it relates to the division) when they leave the marriage. Even if you and your spouse negotiate the terms yourselves, both parties will still want an accurate financial disclosure to ensure compromises and settlement terms are fair.
If a business is valued higher than it should be, the party who does not own the business may receive a larger share of marital property. Conversely, if a business is valued lower than it should be, the party who does not own the business may not receive an equitable share of the marital assets.
To determine your business’ value (as well as the business owner’s salary in some cases), there will be a business valuation. This can be conducted by a forensic accountant, CPA, or appraiser. One or both parties may elect to hire their own business valuator. In evaluating the business, the appraiser may take one of the following approaches.
- The income approach. The business’ value is determined by converting its projected future earnings into a comparable present amount. Using this method, an appraiser will need to estimate the future economic value and cash flow, evaluate the business’ performance trends, and adjust the earning’s estimation with consideration to non-recurring income (i.e. restructuring costs, settlement compensation, etc.).
- The market approach. The business’ value is determined by using the value of similar businesses as a guideline. Under this method, an appraiser will compare your business (or business interests) with that of another business that has recently been sold to estimate its current value.
- The cost (or asset-based) approach. The business’ value is determined by evaluating the business’ liabilities and assets. This method aims to estimate what a potential buyer would pay and focus on the company’s net asset value.
A business valuation is still necessary if you (or the other party) do not own the entire business and only have a majority or minority interest. The business interest will still need to be valued and categorized as marital or separate property.
How Is the Business Divided?
You and your soon-to-be-ex-spouse can settle the division of property and come to an agreement yourself (via mediation or negotiations). However, if left up to the court, a business that is marital property can be awarded to one or both parties, and you may have to:
- buy the other party out,
- sell the business (and split the proceeds), or
- welcome the other party as a business partner.
Contact Us for Quality Legal Advice
If you are a business owner or investor going through a divorce, you should retain Dale L. Bernstein, Chartered Law Office. Our attorney has over 35 years of experience, and our team is equipped to help you protect your business during divorce litigation or negotiation.
Schedule an initial consultation today by calling (727) 312-1112 or reaching out online. We can work tirelessly to achieve the best possible solution in your case.