Divorce and a Family Business
Married couples sometimes go into business together. This arrangement can take several forms. An example is when one spouse primarily runs the business while the other manages the household or holds another job. Another possibility is that both spouses collaborate on the business. It is therefore inevitable that when a marriage ends, there is conflict over how the business will be accounted for.
How is a Business Valued?
If the business in question was started during the couple’s marriage, then it is considered a marital asset. This is true even if one spouse ran the business, while the other stayed at home and raised the children. Raising children and managing a household is viewed by the law as contributing to the business by allowing the other spouse to focus on developing the business.
In Illinois, marital assets are divided in an equitable manner during a divorce. This includes an equitable distribution of the business’ “fair value.” It is of critical importance to both spouses how this fair value is determined.
An experienced attorney will work closely with an expert business valuator, such as a forensic accountant or analyst in order to establish a fair value. Some attorneys will work with an Accredited Business Valuator (ABV). It is important that your attorney understands the applicable laws to guide this expert. There are different methods in which a business is valued, and the expert valuating the business will generally use some combination of these approaches.
- A market approach creates a fair value of a business based on a sampling of the valuations of other similar businesses in the same market. An expert will also consider the reputation of the business as well as its’ potential for growth. This approach is more practical for larger businesses, as it requires access to frequent financial reports from other businesses.
- Asset approach. This approach simply appraises the total value of all the assets that a business has, then accounts for depreciation of those assets.
- Income approach. This approach looks at the current income generated by the business and projects future income.
How Does a Court Divide a Business in a Divorce?
There are many possibilities for the division of the fair value of a business in a divorce. The parties may agree to sell the business and divide the proceeds from the sale. Or if the parties remain amicable, they can continue to operate the business and divide the profits. A court can also reward the business to one spouse, while ordering that spouse to pay significant alimony based on the estimated profits from the business. Or instead of significant alimony, the court can offset the lost shares in the business by rewarding the spouse other marital assets. Another possibility is that one spouse effectively buys out the other spouse’s shares of the business.
Getting the fair value of a business right requires an experienced attorney who knows the law and can work with an expert appraiser. If your ex-spouse has an attorney, you need one too. I have assisted in business valuations and divisions of all complexities, and can make sure that you get your fair share of the family business. Let the Law Offices of Robert S. Thomas work for you. Call us today at 847-392-5893 for a consultation, or visit our website.