Family-Owned Business

As noted in the section on dividing marital and community property, courts usually favor giving a family-owned business to the spouse who runs the business. The other spouse may be given other assets in exchange, such as the family home or bank accounts.

The situation is more complicated if both wife and husband have been actively involved in the business. The court may set up an arrangement by which one spouse has the right to buy out the other spouse over time. Alternatively, the right to buy out the other could be sequential—first given to one spouse for a certain period of time, and then to the other spouse for the same period of time. As with handling division of the family home, a forced sale might be an option if neither party can buy out the other party (although most courts would favor giving the business to just one spouse rather than dissolving an on-going business).

If the court thinks the parties can continue to work together despite the divorce, the court may continue the status quo with the husband and wife remaining as business partners, even though they are no longer marital partners.

Valuation of family businesses can be difficult. A closely held business, by nature, does not have a value that can be readily ascertained on a stock exchange. (A closely held corporation is one that is owned by a few shareholders, and the shares of ownership are not traded on a public stock exchange, such as the New York Stock Exchange or NASDAQ.) If the business is of sufficient size, it could be worth the parties’ efforts to hire experts such as accountants or business consultants to evaluate the business, assuming the value of the business is disputed or uncertain. On the other hand, if the business is very small or clearly does not have a significant positive value, it may not be worth the time and money to thoroughly evaluate the business.

When trying to ascertain the value of a business, it is helpful to look at financial statements of the business, reflecting the business’s assets, liabilities, income, and expenses. Tax returns and checking account records also can provide valuable information—sometimes more accurate than the company’s internal financial statements.

Loan applications of the business (or of the owner of the business) may provide highly valuable information. Businesses and individuals may make “generous” statements about income and assets when seeking a loan. Such statements are very useful to the spouse of the business owner when the spouse wants to show that the business is worth more than the business owner claims during a divorce.

If there has been a recent good faith offer to buy the business, that, of course, is valuable evidence about the value of the business. Information about the purchase price of similar businesses can also be useful.

Cash businesses can be particularly hard to value, especially if the owner tries to hide income. If the stated income of the business owner does not match the amount of money the parties have been spending over the past few years, proof of the parties’ expenses compared with declared income can help the court infer that the business is worth more than the owner says it is.

If the spouse who is not the business owner presents proof about hidden income or inflated expenses, that can be the basis for a greater award of other property, as well as perhaps higher alimony and child support. When seeking to claim that income is greater than the other party says it is, you need to be alert for other explanations for the added funds. For example, if your spouse has been meeting business and family expenses with loans that have to be repaid, then the funds from those loans would not be a basis for a larger award of property, alimony, or child support to you. Instead, you may receive a lesser amount of property, alimony and child support since your spouse is likely to be saddled with the debt that needs to be repaid.