When a person owns a business, divorce can pose special problems. There is no “one-size-fits-all” solution, and a business owner who is going through a divorce (or a spouse of a business owner) needs competent and experienced legal representation to address valuation and tax issues.
Usually in the context of a divorce, it is necessary to establish a value for the business in order to fairly include it in the property division spreadsheet. And, usually a business appraisal is performed by a professional appraiser. The appraiser seeks to answer the question – what would the average buyer pay to acquire the income stream. There are various formulas that an appraiser might use, and the capitalization rate that he or she selects can vary from business to business. Counterintuitively, the appraiser does not ask what an actual buyer might pay, but, in light of the formula, what would an average buyer pay.
When valuing a business from the perspective of the outside spouse (the “outside spouse” is the person who does not run the business, and to whom the business itself is probably not going to be awarded) it is important to look at the spending patterns the business has engaged in in in the past. Is the business paying the personal expenses of the owner? For, example, is the business providing the owner with an automobile, is it paying his or her automobile insurance, and is it paying other expenses which could be considered personal to the owner? Who owns the property that the business is situated on? Is the business paying the owner rent? Or, if the business is an office building or an apartment building, is it fully leased? What are the durations of the various leases?
This information is probably not found in the business’s tax return. An expert may have to review the business’s accounting ledgers, including sub-ledgers that provide details on individual expenditures. There are many other kinds of documents that provide valuable insight into the inner-workings of a business entity, and you should select an attorney who knows what these are and who knows how to get access to them.
Sometimes a business owner has an ownership interest in a business in the form of stock shares or partnership shares. While these have value, typically there are share transfer restrictions placed upon them when the business was formed. A share transfer restriction places a restriction on who may own stock in the company. Usually, when a share transfer restriction is in place, the only person who can buy stock is another shareholder, or someone else who is approved by the directors and/or shareholders. A share transfer restriction can reduce the value of the stock because the stock is not freely transferrable. Shares of stock that are publicly traded on a stock exchange do not have share transfer restrictions, and anyone can buy them.
Sometimes shares of stock are held in an Employee Stock Ownership Plan. These, too, can be the subject of share transfer restrictions.
It is also important to obtain information about the equipment and fixtures owned by a business. And, if the business owns intellectual property (trademarks, copyrights, patents, secret recipes, etc.) these also need to be valued.
If you are going to be involved in a divorce proceeding in which the disposition of a business is an issue, you should call attorney Dan Fiskum at (952) 270-7700 for more information and a free divorce case analysis.