Generally speaking, there are a few different things that can happen to a business when a couple owns and manages the business together. First, of course, is that one of the partners gives up their share of the business as part of the divorce settlement and then goes on to do something else. The second is that the two spouses remain business partners and attempt to manage or keep their shares in the business together. Lastly, in cases where the business is unlikely to survive the divorce, the couple may opt to liquidate the business and then distributed it in accord with Ohio’s equitable distribution laws.
Key Factors in Resolving Business Ownership in a Divorce
There’s no manual for dividing ownership in a business during a divorce. Each situation is unique and will depend heavily on the wishes of the spouse. In the majority of these cases, one spouse chooses to divest their interest in the business either because they want a clean break or because it makes more sense to do that for all parties involved. In a lot of cases, the business might end up in a tug of war between the two spouses. This can happen for any number of reasons. Sometimes the spouses will try to make a post-divorce business partnership work. Sometimes it does. More often it doesn’t. Some of the major factors that will determine what happens to a business during a divorce include:
When the business was started.
Ohio considers marital property to be anything that was acquired during the marriage. If the business was started during the marriage, it is marital property. If one spouse started and owned the business before the marriage, it is more likely to be considered their property depending on several other factors.
The increase or decrease in the business’s value during the marriage.
If one spouse started the business before the marriage but the other spouse made significant contributions to the business during the marriage that caused the business to increase in value, then this will have a major impact on what the court deems and equitable distribution of the business.
Who wants the business?
If either spouse wishes to divest their interest in the business, they can do so. But their share of the business must be valuated and then the court must assign a percentage.
As business owner divorce attorneys in Columbus, Ohio, the Lawrence Law Office has successfully negotiated deals that involved complex interests that both spouses had in a single business. While it’s true that sometimes one party walks away feeling angry at the outcome, it’s also true that arrangements can be made to satisfy the needs of both parties.
Since Ohio is an equitable distribution state, one spouse who is seriously committed to the business can buy out the other party’s interests. The complexity comes into play when attempting to properly evaluate the business.
Appraising a Business During a Business Owner Divorce in Ohio
A business that was formed during the course of the marriage is considered marital property. Even businesses that grew during the marriage can be considered marital property under Ohio law. If one party wants to dissolve their stake in the business or if the business will not survive the marriage, the business must be appraised for the purpose of dividing the stake. The business will be appraised in accord with the fair market value as of the date of separation.
In some cases, the process of valuation is quite simple. Unfortunately, businesses are difficult to appraise for a number of reasons. In addition, when there are two competing interests, the party who is dissolving their interest in the business may overestimate its value or vice versa. During the negotiation process, an effort will be made to come to some agreement concerning the value of the business for the purposes of the divorce.
Alternatively, as often happens in divorce litigation, and certainly high net worth divorce litigation, a third party may be hired to provide the fair market value of the business. The parties can either accept this valuation or appeal the decision by having a second third party come in and valuate the business.
At this point, both parties are costing themselves and each other a lot of money in both legal expenses and expenses related to the appraisal of the business. They will either agree to move forward with the third-party appraisal as the basis for the business’s value or attempt to negotiate the value with one another. If they cannot come to an agreement, the judge will be forced to rule on the business’s value for the purposes of the divorce.
There are three main ways to valuate a business. These are:
- Appraising the assets;
- Determine the market value; and
- Assessing the annual income.
Different approaches will make sense for different types of businesses. For instance, an asset-based approach would make sense for a business that deals in retail and has a lot of stock. Income-based approaches might make more sense for professional firms and a market-value approach can be effective for just about any business. The market-value approach is based on comparisons to similar businesses and prices for which they have sold.
Misrepresentation of the Business’s Value
In cases in which the couple both own and manage the business together, each party can be relatively secure that the other is not attempting to hide information from them. In cases where one party only has a stake in the business and that stake needs to be divided evenly during the divorce, it is possible for them to misrepresent the business’s actual value or withhold information critical to the process of appraising the business.
If one partner defrauds the other during the valuation process, the defrauded partner can later sue to recover their lawful stake. This, however, is not ideal. Such lawsuits can take years to reach agreements and are very costly. The best road forward is to insist that the business is accurately appraised during the divorce to ensure that your stake is protected. If you need assistance, it is in your best interests to contact a high asset divorce lawyer for immediate help.