A business can have a big impact on a divorce if it’s included in a settlement. Furthermore, if your spouse is seeking spousal support, that support will likely come from your business.
Equitable Distribution rules are used in most states, including Colorado. During the divorce settlement, a judge takes a number of factors into account, not limited to the duration of the marriage, the age, health, education/training , and ability of each individual to support themselves subsequent to separation.
Being faced with paying a portion of your company’s value to your spouse can raise concerns about the survival of your business. When considering what your spouse is entitled to receive from your business, whether half, nothing at all or something in between, an experienced forensic accountant or business valuation specialist may be able to assist in determining the division of your business and assets.
Under some circumstances, when a spouse is paying spousal support from a business’ profits and being asked to divide the marital property part of the business, there may be an adjustment that could be made to avoid or minimize double dipping. How much of an adjustment, if any, depends on the facts of the case.
Valuation
In order to divide the marital property portion of a business, the business must be valued. The valuation must address what the business is worth – the marital, separate or combined portion. If the business was owned prior to the marriage, a forensic accountant may be needed to help determine the value of the business at the date the marriage began (in order to determine how much the business grew during the marriage).
A business is an asset and needs to be characterized as marital property, separate property, or a combination before it can be valued. Formally valuing a business requires hiring a business valuation expert to investigate, carefully review all of your relevant business documents and provide an opinion on the value of the business.
Characterization
It’s important to understand the difference between separate and marital property when defending assets such as your small business. Separate property typically includes property owned before the marriage, inheritance and/or gifts received only by one spouse. All other income, property, and assets attained by either spouse during the marriage will be considered marital property. Over the course of the marriage, the increase in value of separately owned property can be considered marital property unless separate contracts exist where the parties have agreed otherwise.
When a business predates the marriage, several factors go into determining the separate and marital parts of the company. A few are:
- duration of business’ existence prior to marriage
- assets and profitability of the business prior to marriage
- value of the business at time of marriage
- whether the business has the same value as it did at the time of marriage or has become more or less valuable
- change in value resulting from the joint efforts of the couple
Separate Property Funds
If your business started during the marriage, don’t assume your business is marital property. It’s common for a business launch with start-up money, which may have been a gift to you, money you had before the marriage or money you invested from another separate source. That investment could result in a separate or partially separate property interest in the business.
Family Inheritance
Some businesses are passed down from family. Even if the business predates the marriage, you put time and/or money into the business during the marriage. First, you need to show the business was a gift to you or doesn’t create a marital interest in some other way. Your separate ownership interest is then evaluated. Will your parents maintain an ownership interest, or are you inheriting the entire business or splitting it with others? Next, we determine if the couple has any marital interest in the business by analyzing the time and money invested in the business as well as appreciation during their marriage.
Business Partners
Regardless of when the business started or how you acquired it, the characterization or valuation procedure becomes more complex if you have a business partner, fellow shareholders or members who have ownership interest. What value did the time or money put into the business by the divorcing couple bring to the business and what was its impact on the business’ profitability or valuation?
Divorcing spouses are usually faced with valuing a business interest in dollars. Whether dividing all of a business interest, or just its growth during a marriage, the use of a forensic accountant is critical. In the event of a divorce, your attorney and forensic accountant will work together to answer these questions. We have just scratched the surface of this issue, as there is so much more that goes into it.
Shuster & Company, PC offers an extensive range of services, with emphasis in forensic accounting, divorce consulting, business valuation, and litigation support. As a full-service Certified Public Accounting Firm located in Denver, we provide quality, personalized financial advice and guidance to individuals, businesses and the legal community.