Ending a marriage is hard enough, but when a closely-held or family-owned business is involved, can make an already complicated situation even more difficult. If you and your spouse have decided to get divorced, you may be wondering how you can protect your family’s primary economic engine. Not only is the business one of the assets to be divided, but the divorce has the potential to adversely affect the orderly operation of the enterprise. Regardless of your differences, you and your spouse should focus on maintaining the continued vitality and value of the family and/or closely held business.
Connecticut follows the rule of “equitable distribution” with respect to any assets owned by either or both spouses subject to division in a divorce, regardless of when the assets were acquired. The scope of this rule includes family and closely held businesses in which either spouse or both spouses have an ownership share. [It is important to note that “equitable distribution” does not mean equal, but rather fair.]
When a property division dispute cannot be settled and needs to be litigated, it is absolutely essential to obtain a compressive business valuation. Such valuations are not simple matters. Although the goal is to determine how much the business could be sold for in an arm’s length transaction, valuation experts may take different approaches.
The three main valuation methodologies used to value family and closely held businesses are:
(1) Weighing assets against liabilities (Book Value);
(2) Measuring past, present and projected earnings (Discounted Cash Flow); and,
(3) Comparing the business’s value to similar entities in the same market (Relative Valuation and Comparables).
In such cases, it is typical for each spouse to retain their own subject matter expert, complete separate valuations, and present their competing narratives. Conflicts between the resultant valuations must be resolved by agreement or by a family court judge.
Once the financial value of the parties’ family business ownership interest has been agreed upon and/or determined, divorcing parties then face the practical matter of distributing that value between themselves. At this point, operational concerns, liquidity challenges, financing (the buyout of one spouse), or how best to facilitate the sale of all or part of the business come to the forefront of the divorce action:
Many other important considerations can come into play that influence this choice:
Another important step if you hold business assets is to have a Connecticut divorce attorney review a prenuptial or postnuptial agreement that you and your spouse have entered. It likely includes provisions that will impact what happens to the business and its proceeds should the owners split up.
Business ownership presents special issues in a divorce but they are manageable if handled properly and with foresight. In these situations, it is especially critical to engage an experienced divorce attorney – one with a network of business valuators and related technical experts.
The lawyers at Needle | Cuda understand the issues that arise when a closely held business is among the assets in a divorce. If you or your spouse own a stake in a business, you can trust our experienced team to zealously represent you. Schedule a consultation with our Westport lawyers by calling 203-557-9500 or by contacting us online.
While it is rare that a spouse will lose all interest in a business due to a divorce, the business may need to be sold. Still, when this happens, the proceeds from the sale will be distributed between the parties. It is unlikely a business asset will be sold with only one spouse receiving all of the proceeds.
How much the business is worth can be determined through the use of business valuation experts. These professions will look at the business's data and draft reports that will tend to show what the business is worth. Another method is comparing the sale prices of similar businesses within the same industry.
Through a process known as discovery, your lawyer will be able to request all relevant information concerning the business and its financial health. Valuation experts can then analyze that info to paint a picture of the company's worth and projected outlook. Once a value is determined, the business may then be distributed by the court upon divorce.