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What To Do About a Business in a Divorce

So you own a business and you think like a business person, and you are getting divorced.

Keep that “Bottom Line” mentality about your case, because it can be a bit of a maze of legal and accounting concepts.

You have a business that started, “was acquired,” during the course of the marriage.

Did you put all the “effort and money in” while your spouse stayed at home, taking care of the home and kids? Or did your spouse come to the office, generate clients, do the bookkeeping, or run the cash register?

If your spouse never stepped foot in the business but cared for the children and home, the court looks at the business just like other assets acquired during the marriage. It is joint property subject to Equitable Distribution.  Your spouse took care of the home and family, so you could focus on the business.

Generally speaking however, a spouse that never participated in the business receives less than a 50/50 share of your interest, whereas one that participated significantly usually receives 50/50 or close to it.

When valuing the business, a forensic accountant can use various approaches. “Capitalization” is one method, where the income of the business is determined and then multiplied by a “Cap Rate”. It is a blend of adding, different risk factors, and subtracting growth.

A high Cap Rate in simplistic terms means that the business is higher risk, lower value. A low Cap Rate is lower risk, higher value.

Although we are dealing with accountants who are generally quite objective, these Cap Rates can be very subjective, leaving room for argument.

Market approach is another method comparing similar businesses sold from data bases.

Another element of calculation accountants use in the valuation context is reasonable compensation ie. if you are a dentist and you got a job at another office, what would your reasonable compensation be? Let’s use $150,000. But at your own practice your personal gross is $250,000. Even though it is just you, there is value: 100K extra a year from owning the business. This is value that is distributable in a divorce.

New Jersey is different than a lot of states in that it uses what is called “fair value,” not fair market value as the standard of value. To give a simple example; you have a minority interest in a business with your brother. You own 40%, and he owns 60%; your vote doesn’t count as much as his. Should the value of your stock be less than his in the same company, because he can push you out? Obviously if you are the minority shareholder you want to be fairly compensated, without being forced to take less because you have less power. This is how it works in divorce court in New Jersey to protect the spouse with less power.

The court however is also a court of equity; if you are a business owner and you can’t sell your business, or you have a financial reason for the business to have limited value, this must be considered.

Family court judges are not accountants. They also have wide discretion.

Forensic accountants also have elements of subjectivity and discretion when preparing their valuations of businesses.

If you have a business that might be subject to Equitable Distribution, make sure your attorney understands business valuation principles so she/he can question/dispute or support the validity of the conclusion of the expert.

You and your lawyer must be able to properly analyze the elements and factors that go into your business valuation and work diligently to come to a fair and equitable resolution of your divorce case, so you can move forward positively. Most businesses are kept by the business owner with either a payout or credit against other assets to the other spouse.

Tanya Helfand is a certified matrimonial attorney with 23 years of experience. She is licensed in New York and New Jersey. She herself has owned retail businesses as well as the law practice and is very sensitive and knowledgeable about this subject when representing either the business owner or non-owner spouse.

 

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