Calabrese Associates, P.C.

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Should You Sell Your Family Business During Divorce?Business owners have three options when their business is a marital property that is subject to division in a divorce:

  • One spouse can retain full ownership by buying out the other spouse’s ownership interest or giving up other marital properties;
  • Both spouses can be co-owners of the business; or
  • They can sell the business and split the proceeds as part of the divorce.

The third option is usually the least popular because selling a business may be giving up your livelihood. There are some situations where selling a business is a viable option, but you still must consider the complications of doing so.

Receiving Fair Value

You want to be well compensated if you choose to sell your business and lose a source of income. Before presenting your business to potential buyers, you will need to assess your business’s value, including its potential for growth. With an estimated value, you will know what a fair asking price is for your business. Unfortunately, other factors may drive down what you can receive for your business. A downturn in the economy as a whole or in your industry may decrease the number of potential buyers and how much money a buyer will want to spend. You may need to keep your business if you cannot find a buyer willing to pay fair value.

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How Your Divorce May Affect Your BusinessGoing through a divorce can be perilous for your business, particularly if it is a smaller, family-run business. Some owners have seen the value of their business drop or lost control of it because of the consequences of the divorce process. It is important to work with your divorce attorney on protecting your business during the divorce and allowing it to thrive afterward.

Marital Property

You may need to fight for ownership of your business during your divorce negotiations. Your business is marital property if you created it during your marriage or used marital assets to invest in it. A business that predates your marriage can be nonmarital property, though the amount that the business increased in value during your marriage can be a marital asset. You have several options when your business is part of the equitable division of property. You can:

  • Have complete ownership of the business in exchange for other marital assets of equitable value;
  • Co-own the business with your former spouse after the divorce;
  • Split your business into two companies that you own separately; or
  • Sell your business and divide the proceeds.

The option you choose may depend on the size of your business and how involved your spouse is in it. Your spouse may be content to let you keep the business if he or she is not part of it. A spouse who helped create and run the business may be unwilling to give up his or her business ownership without ample compensation. However, co-owning or dividing a small business may be impractical, and selling your business means losing your source of income.

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Watch for Business Deception During Divorcebusiness in a divorce is at the same time a marital property and a complex entity. It is a major source of income for at least one spouse and has great value as an asset. While it is possible to divide business ownership, it is more common for one spouse to have complete ownership after the divorce. In return, the other spouse is compensated with properties of equal value. However, one spouse may use his or her knowledge of the business to prevent the other spouse from receiving equitable compensation in the division of property. You must be wary of how your spouse may try to deceive you about his or her business during your divorce.

Business Valuation

Your spouse likely has a better understanding than you of the value of his or her business if you are not involved in its operation. During your divorce negotiations, your spouse has an incentive to undervalue his or her business to prevent you from receiving full compensation. He or she may underreport the business’s profits or give a conservative estimate of the business’s future value. There are also ways that your spouse can artificially lower the value of the business, such as:

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Calculating Goodwill as Part of Business ValuationA business’ value extends beyond the earnings that can be attributed to its tangible assets. Factors such as reputation amongst customers can increase its value in ways that are harder to calculate. These intangible assets are known as goodwill and are commonly included in business valuations. When a divorcing couple is assessing a business during the division of property, goodwill should be part of the valuation. However, it can be tricky to put a monetary value on goodwill, and not all forms of goodwill are treated equally in a divorce. An experienced business assessor is needed to understand the true value of goodwill.

What Creates Goodwill?

When competing businesses offer similar products or services, it is a business’ goodwill that may make a difference in a customer’s choice. Goodwill can create greater economic returns by attracting new customers and bringing old customers back. Several factors can add to a business’ goodwill, including:

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Safeguarding Your Business During DivorceBusiness interests are regarded the same as other properties during a divorce. If your business is classified as a marital property, it is part of the equitable division of property between spouses. While you both have a stake in it, the business may be more important to you if you are the primary owner and operator. It is your life’s work, as well as your main source of income. During the divorce, you want to:

  • Maintain control of your business; and
  • Keep the assets that your business needs to succeed.

In order to protect your business during a divorce, you may need to compromise on other marital properties.

Business as a Marital Property

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