Divorce and Your Business

You’ve spent years building a business, and now you are getting a divorce here in Bucks County and fear you will lose half of it in the settlement. There are many factors that go into determining how much of the business is subject to equitable division and how it should be valued. In litigated divorces, the court pits one spouse against the other and decides the fate of your company. However, in mediation and collaborative law, the goal is to find a solution that benefits everyone involved and keeps the business functional and profitable.

Business valuation

The most important step in determining how to divide a business is proper valuation. The business valuation must be done by a professional who specializes in this field. Valuation can take three different approaches: income, asset, and market.

With the income approach, past performance is used to estimate future value, which is then used to calculate current value.

The market approach compares the business to the sale price of comparable businesses, just as valuing a home compares the sale prices of similar homes in the area. This approach works when there is a strong market in buying and selling similar businesses.

The asset approach is useful for companies that are heavy in assets — real-estate holding companies, businesses with heavy equipment, such as construction companies, and other such businesses.

Business scenarios

Once you have a value on your business, we will negotiate a fair distribution of value, using PA law as our guide. Different business scenarios are treated differently.

• Business started/purchased before marriage: The value of the business before marriage is not subject to distribution. The increase in value after marriage until separation is subject to distribution.
• Business started/purchased during marriage with marital funds: The value of the company is entirely subject to equitable distribution.
• Business inherited or gifted to one spouse: The initial value of the business when acquired is not subject to division. The appreciation of value may be considered in equitable distribution.
• Professional practice: A solo professional is generally viewed by PA law differently from a traditional business. PA law distinguishes between enterprise goodwill (value derived from the business’s reputation – usually applied to big businesses with big names) and personal goodwill (which exists because clients seek out a specific professional based on their skills, experience, or reputation – common with mom-and-pop stores and sole proprietorships). 

Dividing the value of the business

If you have any prenuptial or post-nuptial agreements, we will examine them to determine what limitations there may be in the division of the business. In the absence of such agreements, there are several options for distributing the value of a business between spouses.

Negotiating a trade: Your spouse may prefer to keep the house or receive a larger portion of your 401(k) in exchange for the value of the company. This is the most common choice. If you have children, the non-owner spouse will probably want to see the business thrive so that the children will continue to benefit from its profitability.

Buyout: You can pay your spouse his or her marital portion of the company. For asset-heavy businesses, you can transfer real estate or equipment to your spouse in payment.

Installment buyout: If the business does not have enough cash to pay off your spouse, you can create a secured installment agreement, with a promissory note, interest rate, and payout schedule. This can be tricky, however, if the business does poorly and cannot make the required payments.

Sale of the business: Though this is rarely chosen, you could sell the business and split the proceeds.

It’s clear that the division of the value of a company in a divorce settlement is a complicated procedure and needs to be handled delicately. If you put a lot of blood, sweat, and tears into building your business, you want to see it continue to thrive. You may even feel like you deserve to keep its entire value. However, if your spouse supported you indirectly — taking care of the kids so that you were free to work late nights, handling the books or payroll, answering the phone, or taking a second job while you worked to get the company profitable at start-up — your spouse also deserves some benefits from the business.

As an experienced divorce mediator, I guide my clients through the process of fairly dividing the value of a business, empowering them to decide their future rather than depending on a judge to decide their fate or the fate of the business. Reach out to our Doylestown, Bucks County office at (215) 345-5259 to see how we can help you.