Dividing a Business in a Florida Divorce
Dividing marital assets during a divorce can be a complicated and lengthy process. Nowadays many married couples own a closely held business that may be one of the most valuable assets in the marital estate. Going through a divorce when there is a family-owned business in play adds a unique set of challenges to the divorce process.
Before a trial court can divide a business in a divorce, the court must first determine whether the business is a marital or nonmarital asset. Many married entrepreneurs walk into my office under the impression that because they ran the company without any help from their spouse during the marriage, they should be entitled to 100% of the company in a divorce. Unfortunately, that is not usually the result under Florida law.
Is the Business a Marital Asset?
As a general matter, Florida law categorizes all assets acquired during the marriage as “marital” assets. If you formed or acquired your business during the marriage, it is a marital asset subject to equitable distribution in a divorce, unless the business is otherwise excluded from division.
By way of example, a company started during the marriage that would otherwise be “marital” would be deemed “nonmarital” if the parties entered into a valid prenuptial or postnuptial agreement whereby one spouse waives any interest in the other spouse’s business.
However, married business owners should know that even a nonmarital business may have a marital component. As an example, if a spouse inherits a business from a deceased parent, that asset would ordinarily be deemed a “nonmarital” asset, but if the owner spouse commingles marital assets with the business, the business may be classified as “marital” as a result of the commingling. Similarly, if a nonmarital business, such as a business formed by one spouse before the marriage, increases in value during the marriage, a court may identify a marital appreciation portion of the business to account for the growth of the business during the marriage.
Determining the Value of a Business
Once a business is identified as a marital asset, the court must then assign a value to the business before distributing the asset. A closely-held business will need to be valued by a competent financial expert, such as a certified public accountant accredited in business valuation. Experts apply three recognized valuation approaches: the asset approach, the income approach, and the market approach.
One particularly challenging aspect of valuing a professional practice is determining the value of “goodwill.” Courts have defined goodwill as the advantage or benefit a business has beyond the value of its tangible assets. For goodwill to be a marital asset, it must exist separate from the reputation of the individual marital litigant. This value represents “enterprise goodwill.” By contrast, “personal goodwill,” which is attributable to a spouse’s skill or reputation, is not a marital asset, and thus, is not included in equitable distribution.
Three Methods of Dividing a Business in a Divorce
In Florida, marital assets are typically distributed equally, unless there is a justification to deviate from a 50/50 split. There are three common ways to divide a marital business in a divorce.
Buy Out Your Spouse’s Interest in the Business
A buyout where the spouse who has greater involvement in the business buys out the other spouse’s interest in the business is the most common way of distributing a business in a divorce. A buyout only works if the buying spouse has sufficient funds to buy out the other spouse. Otherwise, the buying spouse must be willing to give up his or her interest in other marital assets, such as the marital home or a joint brokerage account, to effectuate the buyout.
The greatest advantage of a buyout is that it allows the spouse who is running the business to continue to do so without interference from the other spouse. It also provides the spouses with a clean break to move forward and live financially independent of one another.
Continue to Co-Own the Business
The second way to divide a marital business is for both spouses to continue jointly owning and operating the business after their divorce. It is not difficult to understand why this option is usually a bad idea. Married couples do not get a divorce because their relationship is strong, healthy, and thriving. Many spouses will not be able to successfully remain business partners after a divorce. In fact, if the divorce is contested, that is a clear indication that co-ownership is not a viable option for the parties. That said, a court is unlikely to compel former spouses to remain in business together. As a general rule, parties who are not amicable and do not agree to remain in business together will not be forced to do so.
Sell the Business
A third option is for the parties to sell the business and split the proceeds. This result is suitable when neither spouse wants to retain the business or when a spouse wants to keep the business but there are insufficient funds or assets to compensate the other spouse for his or her interest. Unfortunately, finding an outside buyer for a closely held company can be time consuming and may significantly lengthen the divorce process, making this option appropriate in only limited circumstances.
In summary, the division of property in a Florida divorce is a three-step process:
- identification of marital and nonmarital assets;
- valuation of marital assets; and,
- distribution of marital assets.
A business formed or acquired during the marriage is presumed to be a marital asset subject to division.
There are three common ways that a marital business is divided in a divorce:
- one spouse buys out the other spouse’s interest in the business;
- both parties continue to co-own the business, or
- the business is sold and the proceeds are divided between the parties.
There are advantages and disadvantages to each method that you should carefully consider before pursuing one option over another. If you are getting divorced and co-own a business with your spouse, you should consult with an experienced divorce attorney.
Those needing assistance in selecting the most suitable method of dividing a family business in a divorce or having other questions about family law issues may contact me directly at 239-344-1119 or email@example.com.