During a divorce, dividing the marital estate is one of the most important areas that needs to be resolved. This, of course, can be a very challenging issue as finances tend to trigger strong emotions. As part of the process, divorcing spouses will need to identify, evaluate, and divide all marital property.
For some assets, this is fairly simple and straightforward. For example, if you have a joint bank account with a balance of $10,000, then there should not be too much objection to splitting the funds in the account 50/50. Houses and vehicles should not be much of a problem either, as they can be appraised fairly accurately based on the current sale price of comparable assets.
When it comes to a divorce with a small business, however, things can get a lot more complicated. If either or both spouses have an ownership stake in a private business, there are several additional issues to consider, and there are a number of ways to approach the division of this unique asset.
Is the Business a Marital Asset?
The first determination that must be made is whether or not the small business should be considered marital property. And this is not always as simple as it may seem. In general (but with some exceptions), all property that was acquired prior to the marriage is considered non-marital property, while any property that is acquired during the marriage is considered marital.
So, if one of the spouses already owned the business before the couple was married, it may not be part of the marital estate, even if the value of the business appreciated during the marriage. If, on the other hand, the business was started or acquired sometime during the marriage, then it would almost certainly be considered marital property; unless one of the spouses received the business through inheritance, as a gift, or they acquired it using non-marital funds.
There are some potential exceptions to these general guidelines, however, and this is why the marital vs. non-marital asset determination could be more complicated than you might think. For example, a business could be brought into a marriage, then marital funds were invested into it. Or maybe both spouses were actively involved in the business and played a major role in making it grow. In these types of cases, the court may rule that it is marital property, or that it is non-marital but that the other spouse is entitled to special equity in the asset based on its growth.
Another common scenario is when business and personal funds become co-mingled to the point where there is no way to separate the two. This is another case in which the court might determine that the business is a marital asset.
Business Valuation
Once a private business (or an ownership interest in a business) is determined to be marital property, the court must decide how to calculate its fair market value. There are several ways to evaluate a business, but they generally come down to one or more of the following three approaches:
Income Approach
This valuation method considers the net income the business has generated over a period of time and uses a multiple of this figure. Another variable that may factor into this method is the current income trend; in other words, whether business revenue has been increasing or decreasing recently.
Market Approach
A market-based valuation considers what comparable businesses are selling for in the area where this business is located, and what a buyer would likely be willing to pay for it. This method is similar to considering the value of a home based on recent sales of comparable homes in the neighborhood.
Asset Approach
This method considers the value of the assets and liabilities of the business and arrives at a net asset value. An asset-based valuation is most appropriate for businesses that own significant real property, such as a factory, warehouse, or commercial office building. Intangible assets such as goodwill may also be considered as long as it is attached to the business and not the individual owner(s).
For example, if it is a local retail business that has a well-established name and reputation in the community, this type of goodwill would be an asset that should be counted. However, if it was a professional practice (such as a doctor or dental office), the patients would generally come in because of the reputation of the doctor and not the practice. As such, this might not be considered a goodwill asset for the purposes of dividing the marital estate.
Ways to Handle a Small Business During a Divorce
When there is a marriage dissolution with business ownership involved, there are a number of ways that this could be dealt with. First of all, it is important to note that South Carolina is NOT a community property state, and marital property in the Palmetto State is divided based on a “fair and equitable” distribution approach.
This means that the marital estate does not necessarily have to be divided exactly 50/50. There is some leeway available to give one spouse a little more than the other in order to achieve what the court determines to be a fair and equitable resolution.
With this in mind, here are some of the potential scenarios for dividing a private business during a divorce:
- Buyout: One of the most common approaches that divorcing spouses with a small business take is to have one spouse buy out the other’s interest in the entity. This could be done by trading other marital assets for full ownership of the business, financing the purchase by making payments directly to the non-interested spouse over time, obtaining outside financing, or a combination of these or other ways. This is a good approach if one spouse is committed to continuing with the business and the other does not want anything to do with it.
- Sell the Business: If a buyout is not a viable solution, then the parties may be required to or agree to sell the business to an outside party and split the proceeds.
- Remain Co-Owners: Although generally frowned upon by judges, in certain unique instances, a judge may approve an agreement between the parties to retain their respective ownership interests in the business. This would be rare, however, and considered a method of last resort, as the courts value finality and permanency in marital asset division.
Work with an Experienced South Carolina Divorce Attorney
Dealing with a small business during a divorce is one of many complications that could potentially arise. And because of issues like these, it is very important for those considering a divorce to work with an attorney who is focused primarily (or ideally exclusively) on family legal issues. This is a very complex area of the law, and you need someone by your side who works in the family courts week in and week out and understands the intricacies involved with these types of cases.
If you are facing a divorce in South Carolina, we invite you to contact the Cate Law Firm for assistance. Call us today at (864) 585-4226 to schedule an initial consultation. You may also message us online or stop by our Spartanburg, SC office in person at your convenience.
Cate & Brough, P.A.
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