According to 2012 Census data there are over two million businesses nationwide that are jointly owned between spouses.  Some are jointly operated by both husband and wife while some are operated primarily by one spouse but are nonetheless owned by both.  What happens if the couple divorces?

Whether determined amicably or not, there are several avenues that can be taken upon divorce with regard to a closely held “family” business. One possibility is continued co-ownership. Of course, this is just not possible or desired in many cases.  If it is to be attempted, a clear written agreement as to each party’s roles, rights and interests in the business should be developed.  Consider this case from a few years ago: A couple’s marriage soured and the husband took actions to exclude the wife from their clothing business. Husband insisted that he and most of the staff would leave the business if she returned in any capacity.  Wife insisted that she wanted to be involved in the business.  The trouble was she admittedly did not know how to operate it without Husband.  When the couple brought the matter to court, the judge was faced with the conundrum that the wife had the right to be part of the business but allowing her to return would likely eviscerate the business.  In essence, the judge ultimately left it to the parties to figure out how to resolve their impasse and preserve their business.  Hatter v. Hatter, 89 Va. Cir. 78 (Augusta County May 5, 2014).

Another possibility upon divorce is to sell the business and divide the profits.  Factors to consider are the price that the couple can reasonably hope to obtain and how long it will take to find a buyer as well as contingencies in the event a sale is unsuccessful.

A third and commonly used option is a buyout.  One spouse will keep the business and the other spouse gets cash (or other asset of value) equal to that spouse’s business interest.   If the business is the couple’s only significant asset, the spouses may have to execute a property settlement note setting forth a structured settlement in which a series of smaller payments is paid over time, as opposed to a lump-sum payment.  In addition to a knowledgeable divorce attorney it is advisable to consult a financial professional and tax specialist who can help determine proper payment terms, including a reasonable rate of interest, and tax liability. The care in crafting buy-out terms cannot be over emphasized.

In one Virginia case, the parties crafted a settlement agreement providing that husband would buy out wife’s closely held company stock over three cash installments. The agreement also provided for the Wife’s continued involvement in the couple’s business as an employee under set terms.  Samuel v. Samuel, 2004 Va. App. LEXIS 41 (Va. Ct. App. Jan. 28, 2004)(unpublished). Unfortunately, the parties later found themselves in court over the meaning of the terms.  In crafting an agreement, parties should thoroughly discuss their intent and carefully review the whole agreement with their respective attorneys to ascertain its meaning and consequences.

If a buyout or sale to a third party is to occur, the business will need to be valued, i.e. appraised (see companion article “Valuation Methods In The Division of A Business”).  This is a complicated task if the business has any significant value and usually requires a professional business appraiser to accomplish it. The expert valuator will determine an appropriate valuation method to use for the business based on the type of business and the availability of relevant information.  There is no uniform rule for valuing stock in closely held corporations according to the Virginia courts, as it is depends on the individual factors involved. Bosserman v. Bosserman, 9 Va. App. 1, 384 S.E.2d 104 (1989).

If the parties dispute a business’s worth in a Virginia court as part of their divorce proceedings, they will need to prove the “intrinsic value” of their business (s a subjective approach that takes into account all aspects of the business, in terms of both tangible and intangible factors). Evidence of intrinsic value is typically presented via expert witnesses (professional appraisers/forensic accountants) hired by the parties.  An expert will decide how to best value the business by using one of a handful of methods depending on the particular case. A significant aspect of business appraisal is the valuation of goodwill, which is essentially an intangible, quantifiable asset arising from the reputation of a business and its relations with its customers. It is not always clear cut, but some goodwill may be attributable to one of the spouses as an individual professional. That is called personal goodwill and belongs to the spouse separately.  Goodwill that is attributed to the practice or business is commercial goodwill and can be marital property.

In addition to personal goodwill, other portions of a business may be separate property of one spouse or the other even if the business started during the marriage. When the fate of a couple’s business is litigated in divorce, the court will assign the date of the hearing as the date on which the business is to be valued, unless a party shows that a different valuation date should be used.  Suppose that after separating one spouse pours individual efforts into the business to increase its value.  He or she could argue that the business should be appraised as of the parties’ separation date for determining the marital portion of the business, and any increase in value after that point is his or her own separate property. However, the party seeking the alternate valuation date should be prepared to demonstrates that there was an actual increase in business’s value from the date of separation to the present, and that the increase was attributable to his/her own separate efforts.  Pearson v. Pearson, 2006 Va. App. LEXIS 334, 2006 WL 2050954 (Va. Ct. App. July 25, 2006)(unpublishd). On the other hand, if one party damages the value of a business, then the other party may wish to seek a date of valuation that is prior to the date of hearing.

The issues involving the division and/or winding up of a business with an attendant divorce proceeding are numerous and complex. Consultation with financial, tax and legal advisors is critical.