It does not take much to complicate the process of divorce, and couples typically have to make a concerted effort if they want to avoid a drawn-out procedure. Property division can be particularly tricky to settle, especially if one spouse was the overwhelming breadwinner, or accumulated most of the marital assets. Along this spectrum, closely-held businesses, while often considered a marital asset, are difficult to evaluate and rarely reasonably divisible, leaving spouses to come to another arrangement.
In other words, splitting a family business is full of potential pitfalls, and an attorney experienced in the nuances of property division in divorce, especially the need to bring in outside experts to provide valuations and an overall assessment of the business’ health, is a crucial component to the divorce process. In addition, the standard used to set a value on a closely-held business or professional practice in divorce cases differs by state. A discussion of how Indiana approaches valuing family businesses in divorce cases, as well as specific considerations divorcing spouses in this situation should factor into negotiations or judicial claims, will follow below.
Valuing a Business
Depending on when the business was established, a spouse may be entitled to up to 50% of the value, so getting an accurate valuation, as well as determining what percentage the other spouse is entitled to receive, is key to a fair division. Like the majority of states, Indiana follows the “fair market value model” that bases the value of a business on what a willing buyer would offer a willing seller, when neither party is under pressure to make a deal, and both have knowledge of the relevant facts. This approach seems straightforward, but different experts can assign different values to the same company, which requires the parties to settle on an acceptable amount, or let a court decide which number should apply.
One issue that can significantly affect the valuation of a company is whether the valuation expert applies a minority or marketability discount. The minority discount is used when the value of a minority owner’s stake in a business is worth less than the actual percentage of ownership, usually due to a limited role in business operations. A marketability discount is applied when ownership stocks are restricted or held by a private company, a situation that greatly reduces the marketability of the ownership interest. The applicability of these discounts is a common point of contention, and an experienced divorce attorney will know how to factor that issue into negotiations, as well as argue for or against it in court.
Special Considerations for Divorce
Property division in Indiana divorces are based upon what is equitable or fair, and while all property owned by either spouse is considered part of the marital estate, courts will designate some property as separate, and not subject to division. Generally, assets acquired before the marriage or with non-marital funds are considered separate, so in the context of a family business, any value accumulated before marriage should remain the sole property of one spouse, and anything accrued later should be divided. Drawing this line is rarely easy, and the advice of an attorney and financial experts is often needed to draw any conclusions. In addition, another key factor is the valuation method the financial expert uses to arrive at a number. The three most prevalent are: the asset approach (fair market value of assets and liabilities), the market approach (market studies and sales of similar businesses in the same industry), and the income approach (earnings generated over a period of time). The chosen valuation method is often a source of contention, and a divorce attorney will know how to assess the impact on a particular case.
Speak with a Divorce Attorney
Dividing assets and debts in divorce is one of the more unpleasant aspects of this process, and you need to make sure you receive a fair portion of the marital estate, as reconsideration of this issue by a court is essentially impossible. Christopher L. Arrington, P.C. understands the pressures and long-term issues facing divorcing couples, and will work to get you the best possible outcome. Contact the Danville office to schedule an appointment.