What Happens To My Business in A Massachusetts Divorce?

Will you lose your business? Will you have to sell it? Few issues in divorce have a greater financial impact than what happens to a business owned by a divorcee. Businesses are part of property division in divorce, and learning the basics about how they’re treated can help you prepare for the road ahead. The business is relevant to both property division and either spousal or child support, as it’s considered an asset and its income used in calculating support.

First, if there’s a support order, the income earned from the business will be used for purposes of the calculation. For both child support and alimony, total gross income is the key number.
For property division, the business is an asset subject to division. The parties must decide what they want to do with the business. If the parties are selling it, the proceeds will be included in the property division calculus. If one of the parties wants to keep the business, the parties can arrange for a buyout, which usually involves either a cash payment or an offset with other assets, such as investments or real estate.

However, whether the business will actually be considered a significant asset that warrants consideration in the property division calculus in the first place depends on its value. And whether a valuation is necessary depends on a number of factors, including the size of the business, its revenue, the number of employees, the length of the marriage, other available assets, and other factors. Generally, the smaller the business, the less likely it is that it’ll be a substantial factor in the property division.

A business valuation is an expert’s attempt to arrive at a value for a business for which no market price actually exists. It consists of the expert thoroughly analyzing the business, including revenue, assets, the owner’s compensation package, taxes, and the overall inner workings of the business’s financial management, among other factors. Business valuations are generally expensive and can cost tens of thousands of dollars, But they’re the most effective means of arriving at a reliable value.

What Will Happen To My Business in My Divorce?

You’ve put blood, sweat and tears into building up your business. Bad enough your marriage didn’t work out. Is your business also at risk?

A business is considered property in divorce. And in MA, all property is considered for division.

The first question is: what’s the business worth?

Like all other property in divorce, to be fairly divided, a business’s value must be determined. This typically requires a business appraisal – otherwise known as “valuation.”

The person conducting the appraisal will consider the business’s assets and liabilities and projected income, among other factors.

The parties can agree on a joint appraisal and accept the suggested value from that single professional. Or they can each hire an appraiser.

If there are two appraisers with different opinions on value, which is not uncommon, the parties will have to negotiate to resolve that issue, and if they can’t come to an agreement, the issue either goes to mediation or the court ultimately decides a fair value.

Appraisals can generally cost anywhere from $5,000 on the extremely low end to tens of thousands of dollars, depending on the size and operational complexity of the business.

Not all businesses are appraised in divorce, however. If it’s a smaller operation, especially a solo-business that consists only of the owner’s efforts, and the income is already being factored into a child support or alimony order, the parties may decide that a business valuation is cost prohibitive – that there isn’t enough value for purposes of property division to justify the cost.

Once you determine the value, what do you do with the business?

The parties may sell it. But more commonly, one spouse keeps the business, and if the other spouse is entitled to some of its value, there’s a buyout. If there are other assets, the parties can agree to an offset to simplify division. For example, one spouse keeps the house, and the other the business.

How can you prepare for a business valuation?

You can make sure your finances are organized. Appraisers may ask for the last three years of tax returns, business bank statements, and sometimes more recent profit and loss statements, among other records.

What you should not do is try to manipulate numbers. Be careful about making substantial and unnatural changes to your business to either decrease its value or your income either in anticipation of or in reaction to a divorce. Remember that the other party may be hiring an expert to dig into your financials. And if you’re caught with your hand in the cookie jar, the court may penalize you for tampering with the asset, and if your income’s unnaturally reduced, it may find that you’re capable of earning more money and attribute the income to you – treat you as if you earned the higher amount.

Businesses are often the most valuable asset in a divorce. A business valuation may be necessary to determine its value. The party primarily responsible for running the business usually ends up keeping it. But, depending on its value and the value of other assets, a buyout of the other spouse may be necessary, which sometimes involves offsetting its value with that of other assets.

Is a business valuation necessary? As lawyers say: it depends.

The picture on one end of the spectrum, a self-employed sole proprietor with a service business that has few assets and generates less than $50,000 per year in income, the marriage was only two years long, and that individual’s full income is being used to calculate child support. It’s highly unlikely under these circumstances that this business will be a significant factor in the property division. And a business valuation would certainly be cost-prohibitive.

However, on the other end of the spectrum, the business and the marriage are both 20 years old, there’s no child support or alimony, and the business generates millions of dollars per year in revenue. Under these circumstances, this business is certainly a significant factor in property division and a valuation is necessary. And businesses can fall anywhere on the value spectrum between these two extremes.

If a valuation is necessary, the parties must then decide whether they’ll hire an expert jointly or each hire their own. It’s more cost-effective to jointly select a valuator. But whether it’s in your interest to hire one independently depends on the facts and circumstances of the case.
Finally, although the business may factor into both support payments and property division, any income considered for support is factored into the valuation of the business for purposes of division.

If you own a business and divorce is on the horizon, it may benefit you to consult a divorce attorney sooner rather than later to prepare yourself for the process and protect your interests.