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Ownership of a Closely Held Business in a Divorce

One of the more complex issues which may arise in a divorce is the ownership of a closely held business.  Where one or both parties own such business interests, the overall equitable distribution of property in the divorce will likely hinge on how that business is valued and divided.

Connecticut is an “all property state”

This issue may occur in a number of different ways:  perhaps the parties own the business together, or one party is 100% owner of the business, or one party has a partial ownership in a business (even multiple businesses) with various other partners.  Connecticut is an “all property state,” where any property, however held, irrespective of title, is available to be considered and divided in the divorce.  That means that whatever the title, whatever the ownership share, a closely held business is an asset of the divorce subject to division.

The discovery process is critical

The discovery process in the divorce can be essential to arriving at the true value of the business.  Even where parties to a divorce are partners in the same business, it is often the case that one party has a greater access to certain kinds of information about the business than the other.  Suspicion runs rampant during a divorce.  A usually profitable business suddenly has its worst year ever, coinciding with the filing of divorce.  Determining whether that sudden change of fortunes is legitimate or contrived is one example of how the involvement of experienced family lawyers often proves necessary.

The Family Lawyer’s Role in the process

A family lawyer must know and understand the advantages and weaknesses of the client in these circumstances.  That means attentive communication with the client.  If the client has less access to the important information about the business, that means an effort must be stepped up to get that information and to ensure the client is being fairly dealt with in the divorce. If the client is the business owner and does have access to the important information, that means using it to the client’s advantage in presenting an accurate picture of the business while demonstrating that the client is being forthright and rebutting accusations to the contrary.  It may also involve situations where the business owner client does not have access to all the information and has to contend not only with discovery by the spouse, but also walking a delicate relationship with his/her business partners.

Discovery on behalf of the less knowledgeable spouse can mean ferreting out such important information as how profitable the business truly is, and what assets it holds in what locations, which sometimes may be grudgingly given or actively hidden.  On the side of the business owner, it may mean providing an appropriate amount of information to ensure that the business is fairly considered, while protecting the business, its owner and employees against overzealous and harassing fishing expeditions which might well hamper operations or imperil sensitive information if not dealt with appropriately.  If the parties cannot reach agreement as to how this investigation should proceed, the matter often ends up in front of a judge to determine how far the investigation into the closely held business should proceed.

Business Valuation Experts

Often the most critical element in determining the value of a closely held business is working with a professional business valuation expert.  Sometimes the parties may choose one neutral expert to give an opinion of value for the business; more often, each party will retain their own valuation expert.  If the matter results in a trial, the value of the business can come down to a “battle of the experts.”  Even for a business owner who knows his/her business well and could testify as to its value, a court will often find the testimony of an outside expert on this issue more persuasive.  It is an important role for counsel to be able to find the right expert to fit the situation, and to also have sufficient knowledge and experience to work competently with that expert to help get the information needed, to understand the methodology of the expert, and to know the questions to ask the expert both in developing the expert’s opinion and potentially presenting that expert’s testimony in court.  While the expert can be an essential member of the team, it is the lawyer’s responsibility to quarterback the legal process and drive the matter to an appropriate conclusion for the client.

At Needle | Cuda, we have many years of collective experience working with closely held businesses in divorce matters.  We have good working relationships with a variety of excellent business valuation experts.  We have pursued and defended against discovery, reached agreements on business valuation which helped settle divorce cases, and litigated the issue where necessary.  Whichever side of this issue you may find yourself, we stand ready to ably assist you.

 

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