Appraising the Value of a Small Business in Divorce

While many people strive to separate their personal and professional lives, it can be difficult when you’re a small business owner. The long hours, financial investment, and sense of responsibility can creep into your off-hours, even if you try to avoid it. 

Separating your business and personal life is even more difficult if you’re in the process of divorce. You may have questions about whether your small business should be considered marital property, the division of assets, and the business valuation process. 

Seeking legal advice from a communicative family law attorney with experience dealing with small businesses during divorce in mediation and litigation can help. 

Can a business be considered marital property? 

During your marriage, you and your spouse have likely accumulated a range of belongings, from household furniture to real estate. These items are commonly (although not always) part of marital property. But does your business count?

To understand, it’s helpful to look at general principles for how marital property is handled. In New Jersey, marital property is subject to equitable distribution during the divorce process. Marital property may include any assets and liabilities obtained throughout the marriage, including your small business. 

Determining whether a small business should be considered marital or separate property can be highly nuanced. For example, you may feel entitled to 100% of your small business assets because you shouldered 100% of the financial and physical burden of founding the business. 

But if your spouse quit their job to begin working at your business after your marriage began, the court will see things differently. 

These guidelines can be a good place to begin discussing the division of assets and business valuation process with your attorney.

Your small business could be considered separate property (not marital property) if: 

• It is explicitly designated separate property in a prenuptial agreement
• You received the business as a non-spousal gift during the marriage
• The business is part of a family inheritance
• You began your business before the marriage or after filing for divorce

Your small business could be subject to equitable distribution if: 

• You started the business during your marriage
• The business you started before your marriage grew significantly in value throughout the marriage
• The business acquired property during the marriage

When a small business is considered marital property

When a small business is considered marital property, and thus subject to equitable distribution, you and your spouse might choose to divide the small business in one of the following ways: 

• Selling the small business and splitting the profit 
• Setting the business aside for one party during the divorce process 
• Maintaining joint ownership with a third-party operator, with one party involved in its day-to-day operations, or with both parties involved in its day-to-day operations 

Business valuation during divorce 

A business valuation determines the current financial worth of your business. During the valuation process, your attorney and the court may consult various professionals as business valuation experts, including: 

• Industry experts who have experience with similar businesses
• Forensic accountants 
• Certified public accountants (CPAs)
• Real estate experts (if your business owns property) 
• Financial analysts capable of reviewing business holdings 

These experts may request access to many documents relevant to the financial status of your small business, including, but not limited to: 

• Tax returns 
• Operating agreements
• Buyout agreements
• Payroll 
• Bank statements
• Credit card statements

Then, the business valuation experts working on your divorce case will use these documents, as well as your testimony, to determine: 

• Who owns the business? 
• If only one partner is considered the business owner, did the other contribute significantly to its success? 
• What is the business income? 
• What are the projected future earnings? 
• What is the fair market value for similar businesses? 
• Will the business be sold as part of the divorce process? 
• Will one partner buy out the other partner? 
• How will accounts receivable and other business income be split? 
• What tax issues and liabilities must be addressed? 

Ultimately, the answers to these questions will have a lasting impact on your family’s financial future. All business assets, tangible and intangible, should be thoroughly addressed during the valuation process. 

Business valuation methods in New Jersey 

You and your spouse may agree to hire a single professional to determine the worth of your small business, or you may hire separate professionals to complete the business valuation process. 

Either way, your choice of business valuation experts matters a great deal. The results of your business valuation will impact the overall division of assets in your divorce case. Whether you and your spouse agree on one professional or you each obtain your own valuator, choose someone reputable and reliable. 

Benefits of agreeing on one professional 

Agreeing on one professional to evaluate the worth of your small business may save time and money. By taking this approach, you might find yourself in the mediation stage more quickly than expected. In addition, agreeing on one professional is more convenient. There’s no need to provide the same documents and information twice. 

Benefits of consulting individual business valuation experts 

The standards for a business valuation during the divorce process are the same, even between different experts. However, when you choose your own business valuation expert, you can trust that they will not share your litigation strategy with the opposing party. 

What if two business valuation experts don’t agree? 

If the numbers produced by the business valuation experts vary significantly, and you and your spouse cannot agree on the value of the business in mediation, your divorce case will go to trial. At trial, the court will consider each valuator’s testimony and reputation. Remember that the court is not obligated to use either valuator’s estimate when determining the division of assets. Instead, the court may choose to use its own valuator.

This scenario lengthens the divorce process and increases the stress associated with it. 

Keeping both parties amicable 

Cooperation from both parties is critical for a truly fair settlement of your divorce case. Once the valuation is finished, negotiations over equitable distribution of marital property can truly begin. If possible, staying amicable throughout the division of assets can both streamline the process and prevent your divorce case from going to trial, which allows you more control over your financial future. 

At Dughi, Hewit & Domalewski, we understand that the stakes are high in this type of divorce case. 

The value of your small business may affect how other marital property is divided. The division of assets related to your business, such as accounts receivable and potential future earnings, may also affect the amount of child support and alimony one party must pay the other. 

Our compassionate family law attorneys recognize your business means more than money to you. Throughout the divorce process, we support you in making informed decisions to protect your business and your financial wellbeing.

Contact us now for your free consultation with our family law attorneys.