Are you a Business Owner Facing Divorce?

Unless you have a valid prenuptial agreement or postnuptial agreement that protects your business as your separate property, when you divorce the business is likely to be an asset that is divided in the divorce. This article provides an overview of what happens without a prenup or postnup.

In North Carolina, any property obtained during the marriage is subject to equitable distribution. Property obtained before marriage is usually one’s separate property and property obtained during the marriage is usually marital property subject to division. An equitable distribution is presumed to be an equal distribution although a judge can award a greater percentage.  This is all set out in N.C. Gen. Stat. 50-20.

If one spouse owned the business before marriage but continued to work in the business after being married, a portion of the business may be separate property and a portion of the business may be marital property. The other spouse is often entitled to one-half the increase in value of the business measured from the date of marriage through the date the parties’ separated. If there has been no increase in value, there may be nothing to divide.

Husband and Wife can agree how to divide the business. One can maintain ownership and buy the other out. For example, if Husband owns a car dealership worth $1 million that was created during the marriage, Wife will be entitled to $500,000. Of course a buy out will require that the buyer can fund the purchase (which often occurs through the transfer of other assets such as 401(k), IRA, real property, etc.). The parties can continue to own it jointly and run it together which is not a good option given that ex-husbands and ex-wives don’t usually get along that well and probably would not be able to run a business together. Or the parties can sell it for its true fair market value and split the sales price.

If the parties cannot agree how to handle the business, the court will divide it in equitable distribution. Often this means the business needs to be valued and the spouse who keeps it will have to pay the other spouse their share of its value. And if the business has so much debt that it has a negative value one spouse may have to pay the other to take the business and its liabilities (this in part depends on the legal structure of the business entity).

Business valuation is perhaps the most difficult aspect of this process. It generally requires that an expert be hired to value the business. Three common approaches to valuing the business include: (a) an assets approach that considers the value of the assets and liabilities; (b) a market approach which considers what the business could be sold for on the open market; and (c) an income approach which determines what amount of capital would be necessary to secure the earnings produced by the business.

Its important that you hire a lawyer who understands complex business valuation.