Family businesses are typically considered marital property in Virginia. Therefore, most are subject to division and distribution during divorce proceedings.
This means if the business was created during your marriage, or if there was a substantial increase in the value of your business during your marriage, it's subject to division and equitable distribution, just like your other marital assets.
Protecting Your Business If You Divorce
There are things you can do before and during your divorce to protect your business. Specifically, you can:
- Plan ahead before you think about a divorce. It's important to have a contract in place that provides some certainty about what will happen to the business if you get divorced. This contract may be a prenuptial agreement, a shareholder agreement, or a buy-sell agreement.
- Get trusted advice when you decide to divorce. Talk to your best friend, a sibling, a parent, your accountant—anyone who usually looks out for your best interests. They will help you make the hard choices about your business and your future.
- Hire the right professionals to work with you. A fair and qualified business valuation expert and an empathetic and knowledgeable divorce lawyer can help you make the right decisions during this difficult time.
However, before you take action, you need to know how to value the business, as well as your options for continuing its operation or determining the need to sell it.
How to Value the Family Business
Family businesses are assessed based on their intrinsic value—what the business is worth to each spouse. This includes both financial and non-financial aspects.
A certified valuation analyst (CVA) or a certified public accountant (CPA) should be hired to assess the business. Generally, the CVA or CPA will use one of the following three methods:
- The income/excess earnings approach. This compares the income of the business-owning spouse to the average income in that spouse’s peer group. If the business-owning spouse’s income is greater than the average income in his or her peer group, then the excess income is valued as part of the business.
- The asset valuation approach. This uses business assets to determine the company's value. This can be difficult if there aren't a lot of assets or it's a service-based business.
- The fair market value approach. This looks at the selling price of comparable businesses in similar markets and makes adjustments for differences.
Additionally, intangible considerations must be part of the valuation. This includes goodwill, or what attracts customers or clients to the business. In Virginia, personal goodwill is not divisible, but professional goodwill is.
CVAs and CPAs may charge a lot of money for their services. If at all possible, you and your soon to be ex-spouse should agree on one person to do the business valuation. Your attorneys can help negotiate this part of the process and find a fair, impartial person.
Protect Your Options
If at all possible, it's important to avoid dividing your business 50-50 during a divorce. Even if the divorce is amicable now, things may change in the future. It may become difficult to run the business as equal partners. While you may decide to continue owning the business together, you should also consider other options, which include:
- Buying out your ex-spouse's share of the business, then operating it without him or her
- Selling the business and splitting the proceeds
Either of these options requires you to value the business, as described above.
Additionally, don't make decisions or take action without first consulting an experienced family law attorney. Our lawyers can help you obtain an accurate value for the family business and negotiate a fair settlement based on your individual and professional goals. Please contact us today to schedule a confidential meeting with one of our attorneys, call 877.652.1553.
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