Business Valuations in Divorce

Business ownership interests can easily complicate a divorce. While most assets in a divorce case can be easily valued and divided or sold, businesses present a whole slew of difficulties. Moreover, since there is usually a substantial or significant value attached to the business interest, who is awarded the business and its value are two areas in divorce that can easily become hotly contested.

Businesses are treated as any other marital asset and absent a prenuptial agreement or some other arrangement indicating it is separate property, it will be subject to division. Even businesses that are thought to be separate property or owned prior to the marriage can be considered partially marital property. Case law in Michigan supports this in situations where there is a concerted marital effort, when the value of the business goes up, the marital efforts together contributed to that increase, even if the business interest was owned prior to the marriage.

Maintaining co-ownership of the business interests is often a non-starter in divorce cases, and not a realistic solution for the majority of clients. Rare is a situation when the parties can continue to work together at a business because after all, the parties’ relationship is strained to the point that they are divorcing. It’s natural for the personal disagreements and resentment to carry over into the business relationship as well, which will certainly negatively impact the parties’ ability to effectively cooperate in running the business. Therefore, in most cases, a sale or buy-out is the practical solution.

If neither party can buy the other out, or if neither party want to continue running the business, the business can be sold. Valuing the business generally isn’t as important for a sale because generally, the market will set the price. However, even with a sale, it is always a good idea to have a general idea of the value to ensure the parties are getting a fair price for the sale.

In situations where one party is awarded the business interest, they will need to either buy out the other party or offset such award with other martial assets to equal the costs. This is one area where difficulties come in because it can be problematic to come to an agreement on the value for a number of reasons. Factors such as the type of business, the maturity of it (i.e., is it a startup), goodwill, and other influences can all affect the value. These complexities make it necessary to sometimes hire a business valuation expert to appraise it. Most divorce attorneys do understand business valuations, the different methods used, and general concepts, however attorneys are legal experts and it often appropriate to hire experts to assist us with the accounting side of things. Since businesses are often a significant asset with real value, this is not an area to cut corners. Due to what can be large swings in the valuations, trying to find a shortcut to a proper valuation will lead to disastrous results. Without having an accurate idea of the value, an attorney would not be able to adequately advise you regarding the fair settlement.

Valuations can vary significantly, depending on the method used. The appropriate method used can depend on a variety of factors as well, including the type of business, the stage the business is in (i.e. start-up or established business), and other considerations. The three commonly used methods to value are the asset value, the market value, and the value of the business as a going concern. Asset value is just that, assets minus the debts. The market value approach considers the intangible value of good will and considers what the business could be sold for on the fair market. Valuing the business as a going concern considers that the business will continue to operate in the foreseeable future and includes both tangible assets and intangible assets. A business valuation expert can determine which valuation method is appropriate for your business based on the unique circumstances of your case and then apply it.  

When the parties use the value of the business as a going concern, it is important to consider whether spousal support will also be awarded in the case because it opens up the issue of double dipping. The spouse that does not get the business but is getting the buyout will receive a share of the money from the business that essentially included that future income in arriving at the payoff value. Combing the payoff with receive spousal support based on the income the business generates is allowing the person to basically be paid twice. This is referred to as a double dip. Double dipping is allowed under Michigan law, but by understanding and being aware of this issue, you can properly address it in your case.

It will also be important to hire a business valuation expert if your case cannot be resolved and goes to trial. At trial, the court will determine an appropriate value for the business, and it is best if the court understands the how and why that supports your claim regarding the business’s value. An expert can explain the important concepts and justify the position much more persuasively. Furthermore, a business valuation expert is that they can assist with structuring an appropriate pay out schedule. Often times, there may not be enough liquid assets or resources on hand to immediately pay off the agreed upon amount. Even if the business does have cash on hand, it may not be the best way to make the payout as the business will need to remain viable.  

Understanding these different valuation methods is key to be adequately prepared to settle your case and how to effectively use experts is important in litigation, even for settling your case. For over 25 years, The Law Office of Kathryn Wayne-Spindler, P.C. has been litigating contested divorces and has extensive experience addressing the many issues that surround business ownership. We can effectively advise and counsel you regarding how your business will affect your divorce. Contact our Milford office at (248) 676-1000 to discuss your situation and your rights and options. We help clients throughout Southeastern Michigan, including Genesee, Oakland Livingston, Washtenaw, and Wayne Counties, as well as Mid-Michigan in Clare, Gladwin, Ogemaw, and Roscommon Counties. Our experienced attorneys have counseled such clients in Milford, Hartland, Highland, White Lake, Commerce, Walled Lake, Waterford, West Bloomfield, South Lyon, New Hudson, Brighton, Howell, Ann Arbor, Holly, Fenton, Flint, Linden, Clarkston, Houghton Lake, Higgins Lake, Roscommon and many more local communities.