- Family Law
- Dispute Resolution
One of the most valuable assets to be distributed during a divorce is the value of a closely held or family business. Whether the business is solely owned by one or both spouses or either of them is a part owner of a business, the interest will be deemed part of the marital estate, giving the other spouse a claim to receive a share of the value of that interest. The difficulty often arises in ascertaining the value of that interest in order to calculate each spouse’s share. The Westport divorce attorneys at Needle | Cuda represent owner-spouses and non-owner spouses in divorces, working to ensure that our clients’ rights and claims are zealously represented and protected during the divorce process and that each spouse received a fair value of the business.
Connecticut is an “all property state,” which means that every asset owned by either party at the time of divorce is subject to equitable distribution. For purposes of what is considered within the marital estate, Connecticut makes no distinction between property acquired before or during the marriage, nor does it matter who is the title owner of the business. This includes a spouse’s interest in a business. However, there are still arguments that can be raised about how the value should be distributed between the parties.
It is important to bear in mind that “equitable” distribution does not mean equal distribution. It means that distribution is supposed to be fair. There are no bright line rules about that determination. The statute invests immense discretion in a trial judge in how that can be done. This is one of the most important reasons why legal advocacy and an accurate and thorough presentation on a party’s behalf can make a significant difference in the outcome of a case.
There are over a dozen factors that are to be considered in arriving at what is a fair distribution. Among the factors that can be critical in considering distribution of a closely held business are the contributions of each party in the acquisition, preservation or appreciation of the asset. These can be counterbalanced by other factors, however. For example, in a very short-term marriage where the parties kept their finances relatively separate, the fact that one party brought his or her interest in the business into the marriage may weigh in favor of the other party having much less of a share in the value of that business. However, if the parties have been married for a very long time and their overall finances and family circumstances (i.e., such as children and all the familial roles and responsibilities that flow from them) have become inextricably entangled, then there is a much greater chance the assets division might focus on a nexus of 50/50. There are also some factors, such as cause of dissolution of the marriage based on fault, which could take what would otherwise be a 50/50 division of assets and provide for some greater share of the assets to the aggrieved party.
The first step in dividing a closely held or family business fairly is to determine its value. Generally, the goal of a such a valuation is to arrive at fair market value, which is what the business could be sold for in an arm’s length transaction between a knowledgeable buyer and seller with no duress present. (There is occasionally debate as to whether some other type of value other than fair market value should apply, but fair market value is the prevailing standard in Connecticut.) One of three methods of valuation is commonly used:
Needle|Cuda, with the assistance of experts such as accountants and appraisers, will analyze the various approaches, and compare and contrast the results in order to determine the optimal way to represent your position. Oftentimes, concepts like discounting come into play to compensate for illiquidity factors like minority ownership (which may pose a greater difficulty in selling a particular share of the business) and must be considered as part of the equation. Additionally, we may turn our attention to the evaluation of buy-sell agreements, when applicable, since divorce courts can consider them as a valuation benchmark for valuing a partner’s share upon his or her withdrawal from the business. And, if there have been any prior valuations or offers to purchase, those may also be significant in determining the value of the business.
Typically, each spouse hires his or her own team of experts. The selection of the experts is very important, because inevitably each expert is called upon to exercise his or her professional judgment to make the leap from the facts to the value they are assigning to the business. That expert’s opinion is likely to be a critical element of either settlement discussions or presentation of the case at trial. Our divorce attorneys have a strong network of accredited experts that we recommend to clients and with whom we work throughout the valuation process.
Determining the reasonableness of the business owner’s compensation can also be critical not only to the valuation and division of the business, but also the proper calculation of alimony. This involves differentiating between the part of the owner’s income which is derived from the business as an investment, compared to the part of that income which is being paid for the employment role fulfilled by the business owner, such as CEO for example. That likely will involve determining what the reasonable compensation would be to replace the business owner in that role by hiring an outside person, since the business owner usually controls his or her own pay so that is no an accurate measurement; there are any number of reasons why the owner might underpay or overpay themselves. Differentiating the employment/ownership aspects of the income stream can be very important to ensure that the asset is properly divided based on the ownership portion while alimony/child support is focused on the employment portion, without double dipping, so that the same portion of the income stream is not counted for both alimony/child support and asset division.
Accurate valuations depend on comprehensive and accurate sets of data to support them, which are not always forthcoming in a divorce. Where one spouse is the owner of the business interest, the other spouse needs to use discovery to learn about the company’s health and profitability. Non-owner spouses seek the business’s financial records and tax returns. Further requests may become necessary as the non-owner analyzes the data and spots gaps and discrepancies. Areas inviting scrutiny may include imprecise accounting and unexplained fall-offs in revenue and/or profitability. However, it is important not to use discovery in a way that disrupts business operations or intrudes on sensitive business information. The business owner spouse may need effective protection from an unnecessary, overly broad fishing expedition into the business operations. It also may be important to both sides who they may speak with at the company and how their data sets compare. Where both spouses are owners of the same business and have different roles and focal areas of knowledge about the business, that may still require discovery to ensure that the business valuation expert has a complete picture and that the approach between business partners is handled thoroughly but discreetly. Our attorneys skillfully conduct discovery requests and analysis of business data to attain a precise and complete business valuation. We also defend against discovery when necessary.
Once a business is properly valued, it becomes part of the assets subject to equitable distribution, which means determining the fair share belonging to each spouse. That share is distributed using one of these methods:
Our attorneys weigh the pros and cons of each scenario and help clients select the approach best suited to the particular situation.
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 203-429-4151 or by contacting us online.