Getting divorced is a stressful experience for most people. Your divorce may create additional stress if you own a family business with your spouse because dividing that business can be complicated. However, you can takes steps to protect your interest in the business when making your plans to file for divorce.
How Is a Family Business Divided in a Divorce?
In Virginia, any property acquired after a marriage is considered marital property, and it will be divided if there’s a divorce. In addition, if one spouse brings his property into the marriage and it is used by both spouses for their benefit, this property can also be considered marital property. A family business generally is considered martial property.
If you and your spouse do not reach an agreement on how to split your assets and belongings, the judge will make an equitable division of your property, including your family business. An equitable division of a family business is one that is fair to both of you, but this does not necessarily mean that a family business or other property will be split in half.
Three Steps to Protect Your Interest in a Family Business
You can take steps both before and during your divorce to protect your rights to the business you own with your spouse. These include:
- Plan ahead. While no one plans to get divorced when starting a marriage, it is a good idea to have a plan in place if you will be owning a business with your spouse. A prenuptial agreement, shareholder agreement, or a buy-sell agreement are a few of the legal documents you can use to define what will happen to the business if you divorce. You should not sign a contract or agreement without having the document reviewed by an experienced divorce lawyer to protect your legal rights.
- Retain an attorney. If you are planning to file for divorce, it is crucial to hire a skilled divorce attorney as soon as possible. He can help value your business and other property and ensure you receive a fair share of the business in your property settlement.
- Hire experts. You may need to retain a business valuation expert, such as a certified public accountant (CPA) or certified valuation analyst (CVA), to accurately value your property. Your lawyer should have a network of qualified experts who can help you.
How a Family Business May Be Valued
It is important to understand how a family business is valued, so you know whether you are receiving your fair share of it in your divorce. There are three main approaches to valuation:
- Income/excess earnings. In this approach, the income of the spouse working in the business is compared to comparable earnings of his peers. If his income is more than the average income of other individuals in his peer group, this excess income is used to value the business.
- Asset valuation. Another way to value a family business is to determine how much the assets of the business are worth. However, this approach would not work well if the business is service-oriented or does not own many assets.
- Fair market value. This method uses the selling price of comparable businesses to determine the fair market value of a business.
In addition, there are intangible elements of a business’ value that should also be considered in determining its worth. For example, the business’ goodwill, which is what attracts customers or clients to the business, should be included.
Owning the Business With Your Spouse After the Divorce
It is generally not a good idea to continue to operate your family business with your spouse after divorcing. Even if you are able to work together amicably now, things could change in the future. Here are two options that may be better:
- One spouse buys out the other and operates the business on his own.
- The business is sold, and the proceeds of the sale are split.
If you are considering filing for divorce, we are here to advise you of your legal options and ensure that your family business and other property are fairly distributed. Call our Midlothian office to schedule your free consultation today.