How Is A Business Divided in a Divorce?
The valuation and division of interests in closely held businesses, including corporations, partnerships, limited liability companies, and unregistered proprietorships, is among the thornier issues that arise in divorces. Where the business is closely held, meaning that the majority of the stock is owned by five or fewer individuals, one spouse typically retains the business interest to avoid conflict in the ongoing management and ownership of the business. The question then arises as to how to compensate the other spouse for what may be a valuable enterprise that comprises a sizable chunk of the family’s wealth. Unfortunately, resolving this issue is a complex, multi-step process that requires a thorough understanding of the business valuation process and dynamics of the business to successfully negotiate a division of the business.
Assuming the business is marital property, the first step in negotiating the division of the business is to value the business. Illinois divorces use the fair market standard in valuing business interests, which means that we value the business as “the price for which the property would sell under ordinary circumstances surrounding the sale of property, assuming both an owner willing to sell and a purchaser willing, but under no compulsion, to buy.” Thus, spouses and their lawyers have the unenviable task of speculating the price for which a hypothetical, fictitious buyer would pay for the business if he had no particular motive to buy it, which happens rarely in the real world. This is not a simple task, and it is far more costly than the valuation of other assets, such as homes.
In determining the value of the business, one or more valuation experts are typically retained by the spouses. In many instances, both spouses retain competing experts, whose opinions sometimes vary significantly. Among the common areas of dispute between valuation experts are discounts for lack of control (meaning the spouse does not have the right to make decisions for the business) or marketability (a discount because the business interest cannot be readily sold), developing reasonable assumptions for projections of the business’ outlook, and allocation of the goodwill of the business. This process involves both guidelines and the subjective opinions of the valuation experts. After the valuations have been completed, the spouses, their attorneys, and their experts attempt to negotiate the appropriate value of the business.
After determining the value of the business, the divorcing couple must reach an agreement as to how the “buy out” of the other spouse’s marital interest in the business will be financed. The most common mechanisms for the buy-out are either an offset against other assets in the estate or structured payments over time. In some cases, a buy-out is either unaffordable or unacceptable to the spouses and they agree to remain in some form of co-ownership.
Needless to say, negotiating these steps to each spouse’s satisfaction is easier said than done. Issues that arise regarding the valuation and division of businesses are among the most likely to lead the couple to a trial. For that reason, where a business is going to be divided in a divorce, it is wise for spouses to retain attorneys with substantial experience with the division of business interests, and who share the spouse’s commitment to an amicable resolution of the issue.
