While we can all agree that Wilmington, NC has much to offer to provide a great quality of life, I think we can all also agree that as far as the job market, good paying jobs are not readily available. As such, many people become entrepreneurs and closely held businesses are common. Unfortunately, “Mom and Pop” in these businesses get a divorce and dividing the business interest is difficult.
The business must be valued during the divorce process and this can be a major source of disagreement. While theoretically, the spouses could agree on a value, usually an independent qualified business valuator is hired and the valuator uses one of three approaches to value the business; the asset approach, the income approach or the market (sale value) approach. Valuations are expensive, so agreeing on using just one valuation, two valuations (and splitting the difference) or even three valuations (and using the middle value) is often the first round of negotiations. If only one valuation is obtained, as you can imagine, one of the parties often thinks the value is too high or too low. Agreeing to sticking with whatever the outcome may be, no matter the approach used, is step one.
Generally, one of three things can happen when dividing a closely held business:
- The business is sold and the assets are divided.
- One spouse buys out the other spouse’s interest; or
- Both spouses continue to operate the business together.
Each of these options has obvious drawbacks. Selling the business, which may not be worth as much as an ongoing business, may also lower the income available to support themselves or to provide child or spousal support. Also, the business may not be very marketable and the economic conditions may not be good. If there is a buy-out, where does that money come from? Sometimes other martial assets can be used or it may be necessary to agree on a structured settlement (a promissory note). When there is a buy-out, avoiding tax consequences is important so getting proper tax advice during the process is important. Operating a business together in a professional manner after divorce is, well, not very popular or easy, but could be done if both spouses are amicable, trusting and respectful.
Finally, if the closely held business is an LLC, for example, (which is very common), it is essentially a separate entity. Appropriate legal advice is necessary when creating an agreement so that the separate entity is not being instructed towards an action in the divorce proceeding when that separate legal entity is not a party to the divorce. Care should be taken to “join” the separate legal entity in the divorce proceeding, if necessary, so the parties don’t end up going back to court.