Getting a divorce is an emotional process. It has an impact on every aspect of your daily life and can make you feel like there’s a giant question mark on your routines, your living situation, your ability to be with your children, and your finances. This is especially true if you or your soon-to-be ex-spouse own a business. In today’s blog post, we’re taking a look at what you can expect when you or your spouse have a business and you’re getting a divorce.
Essentially, if the distribution of a business is at issue, the Court has little authority to do anything with the company unless it is joined as a party to the legal proceeding. This means the pleadings must be amended to join the company itself as a third-party defendant in the divorce action. If transfer of corporate assets are requested by either party, the Court may only order such transfer once the entity is appropriately joined.
Valuation will likely require an expert.
Most successful companies have intricate income streams, stock, account receivables, enterprise goodwill and other assets that must be examined by someone qualified to testify and render an opinion on the appropriate valuation method. The Court will consider the expert testimony and decide the weight it will be given when distributing business assets. Keep in mind that business assets do not have to be jointly owned by both spouses to be considered a marital asset if the company was established during the marriage.
Goodwill as a factor in valuing a business.
Aside from the book value of a business, the company’s goodwill can be either a marital asset or not. The enterprise goodwill of a company can be marital and subject to distribution by the Court if the business was started after the parties’ date of marriage, but the personal goodwill of a business is never marital in nature. For example, if the company is a franchise and not built on the individual reputation of the owner, the value may be empirically assessed by an expert or forensic accountant, from which the Court can make a fair determination regarding equitable distribution. Personal goodwill requires the continued participation of that particular owner, their individual skill set and reputation. Without them, the business would have a diminished value. Accordingly, personal goodwill is not considered a marital asset. A good way to assess goodwill is to consider if the business will be as profitable if someone else were running it. If no, then its value is inextricably tied to the owner’s reputation. If yes, then it has enterprise goodwill, which is easier for purposes of distribution by the Court.
We have extensive experience helping clients with all aspects of divorce, including the business side of things. If you need guidance, let McKINNON LEGAL lead the way.