The prospect of dividing a business, as a potential result of a divorce, can be very stressful. Many business owners do not realize how difficult it is to split a closely held company. If the business is not valued correctly, you could lose more than you expect.
Indiana courts divide the marital estate of the parties, assets and debts collectively, using a principle called equitable distribution. The implication of an equitable distribution, what is just and reasonable, does not always result in an equal division of the marital estate. Learning how businesses are treated in negotiations and litigation is essential to ensure businesses can continue to not only exist, but thrive, even after a divorce.
What is a closely-held company?
A closely held company is a business owned by a small group of people. One spouse or family member often owns it. These businesses are private and therefore do not trade on the stock market. That means you cannot easily determine their value. You need a trained and experienced business valuation expert to determine if any value subject to division exists.
Why valuation matters in Indiana divorces
In Indiana, most property owned during the divorce goes into the marital estate. This includes a business, even if one spouse started it before the marriage or owns all of it. If the couple does not agree on how to divide it, the court will decide.
How businesses are valued
A professional will determine business valuation. Layperson’s opinions of business value have very little weight, if even admissible as evidence. Business valuation experts, often certified public accountants with additional substantial training and experience, may use one or more of these methods during the valuation:
- Income approach: Look at what the business is expected to earn. They may adjust the valuation, depending on several factors like personal perks or a high salary.
- Asset-based approach: Adds up the value of what the business owns, like tools or property.
- Market approach: Compares the business to others that have recently sold. This can be hard for unique companies.
Courts usually want a neutral expert to value the business. But each side can also bring their respective experts to argue different opinions.
Other things to consider
The expert will also look at “goodwill.” This is the value of the company’s (particularly a certain person’s) reputation. If that goodwill comes from the owner personally, then this is referred to as personal goodwill and is not subject to division as a marital asset. But if value is determined from the business itself (enterprise goodwill), then the value, in some form or fashion, will be divided, either directly or indirectly. A direct division means that the business retains earnings or other assets (cash) sufficient to pay the non-retaining spouse a share of the business value whereas an indirect division means that non-business assets (such as a separate personal financial account or cash-based asset) are provided to offset a claim to the business, preserving the businesses assets.
Talk to the right people
Business valuation requires both legal and financial expertise. Contact Scott Smith of Smith Legal LLC to guide you through this complex process, explain your rights, find the right experts and help you prepare your case. With the right help, you can protect your business interests, your future, provide for yourself and for your children and ensure you retain or obtain your fair share.