High Asset Divorce Needs Skilled Legal Counsel

Three common issues in a divorce involving a family business

On Behalf of | Feb 15, 2022 | Complex Asset Division |

A divorce involving a closely held business owned by one party is naturally more complicated than a divorce between couples who are not business owners. This is especially true if issues come forth regarding the value of the business that cause disagreements and delays. The following are three common issues in a divorce involving a closely held business.

1. Valuation for property division

In order for property division to be fair and equitable, the parties will need to agree on the value of the business. Oftentimes a divorcing couple cannot reach such an agreement due in part to the two different valuation methods that can be employed.

One standard for valuing a business is to ascertain the business’ fair market value. The fair market value is the price that a buyer would pay a seller when there is no compulsion to buy or sell and both the buyer and seller have a reasonable knowledge of the all the facts surrounding the sale. Oftentimes appraisers will obtain the value of minority interests by taking into account lack of control and lack of marketability.

A second standard for valuing a business is to ascertain the business’ fair value. While it has some factors in common with fair market value one major difference is that it will not take minority discounts into account. If a party chooses a fair value appraisal, the court will determine what the fair value is. Oftentimes a business’ fair value is very different than its fair market value. This can cause conflict.

2. Double dipping

If only one of the spouses owns a business, “double dipping” can become an issue. Double dipping occurs when a party is awarded two times on the income the business generates. Once is during the property division process. A second is when income is calculated for alimony purposes.

One common method for valuing a business is the income approach. This means the appraiser will calculate the value of the business based on what it currently generates in income and how much income it is anticipated to generate in the future.

Double dipping occurs when the calculation of future income is made part of the valuation process for property division purposes and then the party who owns the business is expected to pay spousal support or child support based on that same future income estimate. The amount used to determine a business’ value can be quite unlike the amount used to determine alimony, especially if the business-owning party earns far more than the market rate for their role in the company. Basically, the difference between the business owning party’s actual and adjusted income was already awarded during the property division process and if the actual compensation is used to determine alimony as opposed to the adjusted income that was used to value the business, then double-dipping has taken place.

3. Delays

As you may expect a divorce involving a closely held business can take much longer to complete than a traditional divorce. Delays can occur at many points along the way, especially if there are major disagreements between the spouses. Even productive negotiations take time. If a spouse owns a business, they can expect that delays will crop up during their divorce that lengthens the time it takes to finalize the divorce. Still, these and other issues can be overcome, and a solution can be found that is satisfactory to all parties involved.