Family Business And Divorce

March 19, 2022

Family Business And Divorce

Divorce can affect many more people than just the spouses getting the divorce. It can also affect their children, their friends, and their family members. If a family business has lasted for multiple generations, the whole family can be affected during a divorce. Adding a family business into the divorce equation can make an already difficult process even more challenging. Each spouse will need to decide how involved they want to be involved in the business after divorce and the best way to divide the business. If you are concerned about a family business and divorce, consider contacting an experienced family lawyer at Johnson Law Group at (720) 463-4333.

Property Division Rules in a Colorado Divorce

Colorado is an equitable distribution state, meaning that when a couple divorces, they can either decide how to divide their marital property on their own or the court can determine a fair, but not necessarily equal, way to divide their property. If the court is tasked with dividing marital property, it will consider several factors. According to Colorado Revised Statutes Annotated §14-10-113, the court can consider these factors when dividing marital property:

  • Each spouse’s contributions to acquiring marital property, including the role of one of the spouses as a homemaker
  • Each spouse’s separate property
  • Each spouse’s economic circumstances when the property is divided
  • Any increases or decreases in the value of either spouse’s separate property value or the depletion of separate property for marital purposes
  • The desirability of keeping the marital home with the custodial parent

Determining the Value of a Family Business

As part of the divorce process in Colorado, spouses are required to provide accurate information about their finances to the court and each other, according to the Colorado Rules of Civil Procedure. This includes providing an accurate assessment of the value of the marital property.

There are several ways that someone can go about determining the value of a business, including:

Per Stipulation

If the business interest is not significant and there is no dispute about its worth, the spouses can stipulate to this value and use it when dividing the marital property.

Income Model

This valuation method uses historical information about the business and formulas to predict cash flow and profits in the future. This information is used to calculate the estimated value of the business.

Excess Earning Model

This model compares the income of the spouse working in the business with others in similar positions. If the spouse’s income is more than the average income of others in the comparison group, the excess income is used as a measure of the business’ value.

Asset Valuation

This approach simply determines the value of the business assets. It then subtracts the business’ liabilities from the assets. When making this calculation, intangible assets should also be considered, such as the business’ goodwill, which attracts customers to the business.

Fair Market Value

This approach considers how much similar businesses have recently sold for, similar to how realtors value houses by looking at comparable sales data.

Expert Valuation

The methods discussed above might not work for all types of businesses. Therefore, many spouses ultimately turn to an expert to determine the value of their family business. A business expert may review various factors to determine the value of a business, such as:

  • The business’ finances, including its assets, income, and liabilities
  • Inventory, including in-stock inventory, office equipment, and machinery
  • Value of real property the business owns
  • History of profits
  • The history of the business
  • The industry
  • Competitors

If the spouses disagree about the value of the business, they might each have their own expert witness who provides testimony in court. The court then decides the value of the business.

Additional Factors Courts Consider When Dividing a Business During Divorce

In addition to determining the monetary value of a business, the court may then consider additional factors to determine how to divide the business. For example, the court might consider:

  • When the business was established (before or after the marriage)
  • The percentage each spouse owns in the marriage
  • How the business’ value changed during the marriage and the reason for those changes
  • How involved each spouse was in the business operations
  • Whether one spouse is in a financial position to buy out the other spouse
  • The division of other marital property
  • The value each spouse brings to the business, including professional qualifications and customer relationships
  • The ability of each spouse to earn a similar wage outside the business

Johnson Law Group is familiar with the factors that courts consider when dealing with cases involving family business and divorce. Our experienced attorneys can help you evaluate your options.

Options for the Family Business in Divorce

There may be many options for a family business during divorce. The option the spouses choose depend on their specific circumstances and relationship.

Some options include:

Selling the Business

The couple may decide to sell the business to a third party and then split the proceeds between the spouses. This allows each spouse to break free from the business and get a fresh start. In some cases, the buyer may decide to employ one of the spouses in the business based on their experience or customer contacts. Selling the business will depend on a valuation and also cause IRS tax consequences as well.

Continuing to Work at the Business

If the couple’s split is amicable and they can continue to work together, they may simply decide to continue to work at the business and not dividing up the business interest.

Buying Out One Spouse’s Share

If one spouse wants to continue to be involved in the business but the other spouse does not, it may be possible for a spouse to buy out the other spouse’s share of the business. Such transfers of property can usually avoid tax ramifications because transfers of business shares is considered a transfer of property incident to a divorce. Therefore, the owner may be able to avoid paying capital gains taxes that they might otherwise be required to pay if selling to a third party. If one spouse cannot afford to buy out the other immediately, the spouses may enter into a structured settlement to pay off the spouse over time.

Splitting Up the Business

If the business has multiple locations, product lines, or departments that work independently form each other, it might be possible to the spouses to split up the business so that they each are in control of different aspects of the business.

Contact a Lawyer for Answers to Your Family Business and Divorce Questions

A family business can be a major asset, and people do not want to lose what they have worked so hard for during their lives. If you are dealing with a family business and divorce, you may want help from a family lawyer who can help properly value the business, guide you through the divorce process, and fight for your fair share of the business. Consider contacting a family lawyer at Johnson Law Group at (720) 463-4333 for this help.

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