You may feel that you alone own your business, but the law might see things differently during your divorce. In many cases, businesses are joint marital property and included in the process of property division. Figuring out how to equitably divide the business means first determining its value, which can be time-consuming and complex.
For this reason, it is important to enlist the help of an attorney early in the divorce process. If you are facing divorce in Pennsylvania or New Jersey and wish to protect your investment of time and energy in your business, Petrelli Previtera Schimmel can help.
How are businesses valued during a divorce?
Valuing a business is much more complex than it may seem. In order to determine the value of a business, one must consider:
- Tangible property
- Intangible property
Often, the business valuation process begins with a qualified appraiser’s full inventory of the tangible property owned by the company. This includes any machinery used to manufacture items, in-stock inventory, and even office equipment. Buildings also fall into this category, if you own them outright. The cash in business banking accounts counts too.
In addition to tangible property, or assets, businesses also have liabilities. These liabilities are an important part of the equation when determining value. Rent on a building or equipment lease, credit lines, or regular outgoing payments for services are some of the most common types of liabilities.
Intangible assets are more difficult to value, but important to a business’s bottom line and ultimate success. These intangible assets include “goodwill,” a concept that relates to how the customers, potential customers, and others view the business. Customer relations play a key role in goodwill, as does participation in the community. It is important to note that oftentimes one partner is “the face” of the business in the community and that ties that partner directly to the goodwill and success of the business.
Lastly, the team charged with valuing the business must calculate the profit of the company, so expect a thorough review of your company’s financial records.
How does equitable distribution apply to businesses?
Both New Jersey and Pennsylvania are equitable distribution states, meaning spouses must split joint marital property — including businesses — fairly, but not necessarily equally.
It is important to recognize, however, that just because you ran the business does not mean you are likely to receive 100 percent of it. The courts consider the role of each spouse in acquiring, building, and running the business, in addition to each spouse’s contributions to keeping the house and family running smoothly.
How this typically turns out in many cases is the court awards the business to the spouse who ran it, but grants the other spouse assets from other areas (the house, retirement accounts, other money, or property) to offset the value of the business.
When both spouses worked hard to build the business or there are few assets otherwise, the court may award a share of the company to each spouse. This forces you to either buy out your former partner, sell your shares, or work together to manage the business.
What do courts consider when dividing a business?
After an appraiser has determined the value of a business, the court will consider a number of factors when deciding how to split that value equitably. These factors often include:
- How involved each spouse was in running the business
- Whether the business existed before the marriage, and the percentage owned by each partner
- The value each spouse personally brings to the business, including professional qualifications and customer relationships
- Whether one spouse borrowed from family funds to buy something for the business
- Whether one partner can buy out the other
- How the spouses divide the remaining assets and liabilities
- The ability of each individual to earn a similar wage outside of the business
A family law attorney familiar with this unique type of divorce case can review your circumstances and discuss potential outcomes. Discuss the business with your lawyer early in the divorce process to protect your interest in the company.
Contact Our Lawyers for Assistance
We know a business can be a major asset. Ensuring the company is divided appropriately during divorce is critical. The lawyers at Petrelli Previtera Schimmel, LLC represent divorcing spouses in Pennsylvania and New Jersey, and frequently those that involve businesses. We can ensure you receive a correct valuation, guide you through the process, and fight for your right to your fair share of the business and other marital assets.
If you have concerns about protecting your business interests during your divorce, we can help. Contact us today at 215-523-6900.