Nolo's Essential Guide to Divorce - Emily Doskow [117]
Obviously, figuring out how much of the business's value is marital property and how much is separate is not always easy. You'll probably want the help of a lawyer, accountant, or a business appraiser who's familiar with the type of business you own.
And unless the value of your business is relatively low-$250,000 or less-and you and your spouse easily come to an agreement about its value and what to do with it, it's probably worth your while to talk to an expert about a reasonable value. There's more about this below.
Keeping things running ...
We had just bought the cafe when things started to get difficult in our marriage. We kept working together to make the business work, and even though we had trouble getting along at home we worked really well together-especially because we made sure there were boundaries. I managed the day shift and David took nights, and we spent an hour overlapping to exchange information and make decisions. Even when we decided to divorce, we kept working together-we still own the cafe together now and both of us still manage it daily. Our working relationship is much better than our marriage was."
-Divorced business owner
Professional Practices
A professional practice, like that of a lawyer or dentist, presents special issues when it comes to valuation. Most of the value of a business like this is in its goodwill-the reputation that the professional has in the community and the resulting income stream from repeat and word-of-mouth business. Valuing a professional practice can be difficult because goodwill is, of course, intangible. One simple and common way is to take annual billings and multiply them by 75% to 150%. For example, if annual billings total $150,000, the value of the business including goodwill would be between $112,500 and $225,000. Some courts use that method, while others consider it as a factor in dividing other assets or setting support, but not in setting the value of the practice.
That's a big range, of course. Where on the spectrum the business's value lies depends on factors such as whether billings are up or down from the previous year, whether large accounts are secure, whether capital expenditures will be necessary in the near future, and whether any of the goodwill of the business rests on factors that will change as a result of the divorce (such as one spouse leaving a position in the office, possibly resulting in a loss of client loyalty).
There's also a lot of variation in how states treat goodwill at divorce. Some don't consider it at all. Others distinguish between "personal" goodwill attributable to the individual professional, and "enterprise" goodwill arising from the reputation of the practice itself. Those states generally divide only the value of the enterprise goodwill.
Long-Term Plans
Looking at the big picture, you have three options:
• sell the business to a third party
• have one spouse buy out the other immediately, or
• continue co-owning the business for an indefinite or a specified period, with an eventual sale or buyout.
If you and your spouse decide that one of you will keep the business in exchange for a cash payment, you'll have to consider how you'll structure the buyout. Very few business purchases (which is essentially what this is) are made with cash on the barrelhead. Most business buyouts are made over time.
If you're the spouse whose interest is being purchased, you'll probably be getting an agreement for payment over a period of years. Make sure you also get some kind of security for that agreement, just as you would if you were financing the sale of your business to a stranger. The security can take the form of a lien on real estate, a mortgage, a promissory note, or a cosigner who guarantees payment. Consult a lawyer about the best way to secure the debt in your particular situation.
If your business is incorporated, there will probably be a stock transfer at divorce whether you do an internal buyout or sell to a third party.
Whether you're doing a buyout or selling to a third party, don't transfer your business