Dividing a Family Business in a Divorce

There are several options for dividing a family business in a divorce, but certain determinations must be made first, namely the type of property the business is considered and the net value of that business.

Businesses started during a marriage are considered marital property. In New Jersey, such businesses can be divided like all other marital assets according to the state’s equitable distribution laws. On the other hand, businesses started before the marriage may be considered separate property and may be excluded from equitable distribution; however, any appreciation of such businesses directly attributed to the efforts or contributions of the spouse who married into the business is subject to the state’s equitable distribution laws. Equitable distribution laws allow for the fair, but not necessarily equal, distribution of marital assets. New Jersey considers one spouse’s efforts to take care of the family or support the household while the other spouse grows the business as contributing to the appreciation of that business. This concept is known as the “marital enterprise.”

Once the type of property is determined, separate or marital, the next step is to establish the business’ total value together with the value of the marital portion of the business. New Jersey applies the fair value standard as opposed to the fair market value. The fair value omits discounts for lack of control or marketability.

New Jersey courts rely on professional business appraisers or forensic accountants to determine business values in divorce matters. These professionals can use several approaches in their appraisals, including:

• The asset approach, which considers the net value of a business’ tangible and intangible assets, minus its liabilities.
• The income approach, which discounts projected future earnings of the business against present day values.
• The market approach, which compares a specific business to the price at which similar businesses recently sold.

Each spouse has the right to hire their own appraiser or forensic accountant. When this happens, the appraisals submitted to court can differ. If the difference is significant, the courts have options: choose one of the appraisals after taking testimony and considering documentary evidence, or appoint a neutral appraiser for a third opinion.

After a value for the business has been determined, there are several strategies for dividing the assets.

• One spouse can continue to operate the business and buy out the other spouse’s share with cash or other assets.
• One spouse continues the business and pays the buyout to the other spouse in installments over a specified timeline.
• Both spouses continue operating the business as before. This is rare and requires a strong, detailed operating agreement.
• The couple sells the business to a third party and splits the net proceeds according to the state’s equitable distribution laws.

After matters pertaining to the couple’s children, if any, dividing a family business is one of the most complex issues a divorcing couple faces. An experienced family law attorney and a divorce team can help guide you through the process and avoid future financial and tax repercussions.