Business Owners and Divorce

"You may already know from friends and family that property is divided between spouses when you divorce. You probably heard their stories about who had to pay a debt and who "got the house."

But did you know that your closely-held business interest is another piece of property that is at risk for division when you divorce?

It's true - your business, more specifically the "value" of your business, is another asset that a judge can divide between you and your spouse upon divorce.

You may wonder, "Divide? How can that happen? My spouse doesn't currently have an ownership interest in the company and knows nothing about what I do! Does the judge make my spouse a co-owner? That doesn't make any sense."

The non-owning spouse does not become an owner with the non-owning spouse. Rather, the owning spouse pays the non-owning spouse for his or her interest in the "value" of the business interest.

"Pay? Do you mean I may need to pay my spouse for my company? I mean, my spouse never lifted a finger to help me build my business!"

The Virginia Code establishes a process of identifying and dividing property when spouses divorce - including business interests. The process is called "equitable division." Equitable does not necessarily mean equal, especially when it comes to dividing business interests. However, you need to be aware that your spouse may very well share in at least part of your company's value, depending on the particular facts of your matter.

"Well, then how is my company valued?"

While accepted methods of valuation must be relied upon, the particular method of valuation used will vary from case to case based on particular facts and based upon the type of business being valued. Some of the methods used are book value, adjusted book value, income approach and market value.

"I'm already familiar with those methods. My accountant and I will come up with a value and send it to you, OK?"

Probably not, unless your accountant has specific experience in valuing business interests in divorce cases. Those with such experience will be knowledgeable of the numerous issues presented when valuing business interests for purposes of divorce, the method of valuation being only one of many issues that can affect the outcome of your case.

"Well, then who has experience in valuing business interests in divorce cases?"

Experts are normally hired to work with lawyers and clients and to possibly testify in Court. Experts work with you and your lawyer as the case progresses toward trial or settlement. Unfortunately, these cases can become a "battle of experts," with each side offering different values and methods of valuation.

"Expert? Sounds expensive. Do I have to hire an expert? How much is this going to cost?"

While it can get expensive, lawyers frequently seek ways to reduce expert costs. For example, a lawyer may obtain a preliminary "rough" estimate of value from the expert at reduced cost in order to consider whether it's necessary for the expert to perform a full valuation of your company. You may learn that the case simply doesn't support the cost of performing a full valuation. Experts are also frequently used in connection with settlement negotiations in an effort to avoid litigation and the significant increase in the costs of going to court. Or one expert is hired by both sides as a "neutral" expert rather than spending money on two separate experts. You should discuss with your lawyer the various ways you can potentially reduce the cost of a full valuation by an expert which can cost upwards of $5,000 to $10,000 or more.

"Can we wait to hire an expert later in the case?"

Your lawyer will want to reach out to an expert as soon as reasonably possible in order to retain him or her before the other side does. Frequently, one or two particular valuation experts are more sought after than others in a particular area of the state (or even statewide). Further, there are a limited number of experts who have experience in valuing businesses for the specific purpose of divorce. Lawyers generally establish working relationships with particular experts who have the needed experience. The expert's experience and advice is also a useful tool in negotiations and developing overall case strategy. It's best to talk to the expert early. So, be prepared to discuss the matter of your company or business interest with your attorney at the beginning of your case."