Classification, Valuation, and Resolution Issues in Divorce Business Valuation Matters
July 30, 2019
Millions of Michiganders own small businesses. In fact, almost 90 percent of the business in the Wolverine State have fewer than 20 employees. Millions of other people have side businesses and ongoing freelance gigs. They are Uber drivers, website designers, salespeople, and the list goes on. Typically, the money these endeavors produce is a family’s primary, or only, source of income.
Typically, these businesses, whether they are full-time or side business, are community property in Michigan. So, an Waterford & Clarkston divorce lawyer must fully account for them during property settlement negotiations.
Classifying Business Property
Although small businesses, small business property, small business debts, and small business income are all typically marital property, there are some exceptions.
Over time, property becomes commingled. That’s especially true with regard to asset-based businesses, like rental homes. Assume Husband owned a rent house before the marriage. Then, Wife used a substantial wedding gift from her parents to fund improvements to the house. Depending on the facts, the house, and the rental income it produces, could be Husband’s nonmarital property, Wife’s nonmarital property, or marital property.
Although the house was clearly Husband’s nonmarital property at the time of the marriage, Wife’s nonmarital gift creates an ownership issue. If the house was so dilapidated that it was unrentable before Wife’s cash infusion, Wife has a very good case for reclassification.
Business goodwill is another issue. Typically, goodwill is just like any other business asset. So, goodwill is generally marital property. But if the business goodwill comes from a spouse’s name (e.g. Brenda’s Beauty Shop), that goodwill might be nonmarital property. Therefore, it must be accounted for separately.
Valuing the Business
Once the classification issue is decided, the next step is determining how much the business is worth. This step usually requires an outside accounting professional as well as a certain business valuation method. The most common ones are:
Book Value: If the business is currently producing little or no income, but things could turn around, the book value approach usually works well. This straightforward method simply values the business’ tangible assets.
Net Income: Other businesses produce considerable income but have almost no assets. For example, the aforementioned web design business might be quite lucrative, and its assets might only be a laptop and a cell phone. The income approach ignores the assets and focuses on money in and money out.
Market Value: Most Waterford & Clarkston divorces use the market value approach. It’s expensive and time-consuming, but very accurate. An accounting professional surveys surrounding businesses of the same type and estimates a value.
Generally, if the parties cannot agree on both a valuation expert and a valuation method, the judge picks both these things.
Resolving Business Ownership Matters
A surprising number of spouses continue to jointly operate the business. Such continued operation is usually in everyone’s best interests, including customers and employees. Many spouses are better business partners than marriage partners.
Buyouts are fairly common as well. One spouse assumes full ownership and compensates the other spouse for his or her share. This buyout often takes the form of an offset. For example, a spouse might sign over a greater interest in the house in exchange for business operation privileges.
If the parties are at a complete impasse, the business can be sold and the proceeds divided. Such a division is usually the last option.
Connect with a Diligent Lawyer
Divorce business valuation is a very complex matter. For a confidential consultation with an experienced Waterford & Clarkston business valuations lawyer, contact Clarkston Legal. We routinely handle matters in Waterford & Clarkston and nearby jurisdictions.