One of the most contentious areas of divorce is property division. This is particularly the case in high net worth divorces, where the divorcing couple is more likely to own a small business. If you are in such a situation, you are not alone, as the U.S. Census Bureau estimates that married couples own 3.7 million businesses in the U.S. Having a closely held business can raise a couple of difficult issues that are not present in most run-of-the-mill divorces. To resolve them, help from outside experts is often needed during the divorce process.
Valuing the business
When both spouses own a business, it can be difficult to decide what to do with the business during the divorce. If the participation of both parties in the business is integral to the survival of the business, it may be necessary to sell the business and split the proceeds, as it is often unlikely that the spouses would be able to continue working together effectively after the divorce. However, if the participation of only one of the spouses is fundamental to the business, in all likelihood, the business will continue to exist after the divorce.
In cases where one spouse will continue to operate the jointly owned business after the divorce, it becomes necessary to buy out the other spouse. This often means that the spouse purchasing the business must give up an equivalent amount of non-business assets that he or she would have otherwise kept under the divorce laws (unless he or she can produce the necessary cash from outside the couple’s marital property). However, in order to ensure a fair exchange, the value of the business must first be determined.
Determining the value of the business is often a complex issue, as the spouses may disagree on how much the business is worth. Compounding this problem is the fact there is no single valid way to measure the true worth of a business. In order to ensure that the business is appraised fairly, it is often necessary to include business valuation experts.
Although it can be present in all types of divorce, asset hiding can be especially troublesome when a closely held business is involved. In some cases, if a spouse is the sole owner of the business, he or she may suddenly report a dramatic drop in business income as the divorce approaches in an attempt to evade paying a fair divorce settlement.
The same financial chicanery can rear its head in jointly owned businesses. In this scenario, one spouse likely has more control over the finances of the business than the other. This gives the spouse the opportunity to “cook the books” in order to gain an advantage when it comes time to buy out (or be bought out by) the other spouse.
In this situation, it is sometimes necessary to employ a forensic accountant to scrutinize the tax returns, income statements and other documents to uncover any deception and arrive at an unbiased estimation of the value and income of the business.
Speak to an attorney
Since dealing with a business in a divorce can be a tricky endeavor, it is important to have the representation of an experienced family law attorney throughout the process. An attorney can work with established business valuation experts and forensic accountants to ensure that you receive a fair divorce settlement under New Jersey law.