Is The Business Marital Property?
First question, and it is not always simple.
A business started during the marriage is normally marital property, and its value is subject to equitable distribution. A business owned before the marriage is normally not, but the growth in its value during the marriage often is, especially where the other spouse contributed to that growth.
A business that came in as a gift or an inheritance is treated differently again, until it gets mixed with marital money or the other spouse works in it.
Very few real businesses fall cleanly into one box. Working out which part is marital and which is not is where these cases start and where a great deal of the money is.
Putting A Value On It
If the business is marital property, the court needs a number for it. Getting that number is usually the most contested part of the whole case.
The owner has to produce the records: tax returns, financial statements, bank records, contracts, receivables, payroll, and anything else that bears on what the business earns and what it is worth. There is no way around that.
A forensic accountant then goes through it. Very often each side has its own, and it is normal for two qualified accountants to come back with very different figures. The gap between them is usually about the same handful of questions: how much of the value is the owner personally rather than the business, what the earnings really are, and what a buyer would actually pay.
What The Business Really Earns
Value is one issue. Income is another, and it drives alimony and child support.
A business owner's tax return does not always show what the business provides. Personal costs can run through the books. Earnings can be held back inside the company. Salary can be set wherever the owner chooses. Business expenses can be inflated, and income can be deferred until after the case is over.
None of that is unusual, and none of it goes unnoticed by a court that has seen it before. The real figure is established by going through the records, not by reading the line on the return.
It Feels Invasive Because It Is
Owners are often shocked at how far into the business a divorce reaches. Records get produced. Employees may be asked questions. Customers and contracts get examined. A competitor is not looking at your books, but it can feel that way.
Much of it is unavoidable. Some of it is not. Protective orders, agreed limits on who sees what, and a sensible approach to what is actually in dispute can keep the process from doing damage to the business itself.
How It Gets Divided
Courts rarely make two divorcing people run a business together. The usual outcomes are:
- The owner keeps the business and buys the other spouse out, either with cash or by giving up other assets
- The buyout is paid over time, with security so it actually gets paid
- The business is sold and the proceeds divided
- The other spouse keeps an interest, which is rare and generally a last resort
The buyout is by far the most common. The argument is then about the number, the timing, and what secures it.
Protecting It Before There Is A Problem
The cheapest time to deal with this is before anything goes wrong. A prenuptial agreement can set out how the business is treated. If you are already married, a postnuptial agreement can do much the same job.
Clean books help too. A business that keeps proper records, pays a real salary, and keeps personal spending out of the company is a business that is far easier and far cheaper to defend when a divorce arrives.
See our page on prenuptial agreements for how that side of it works.