Divorce Articles Section
How Do We Divide the Family Business?
by Carol Ann Wilson, CFDP (Certified Financial Divorce
Whenever one of the marital assets in a divorce is a business,
there are challenges in dividing this asset. A business can be anything
from dentistry, medicine or law, to real estate, or a home-based
business. It can be a sole proprietorship, a partnership, or a corporation.
Value the Business
Becky and James were getting a divorce after 35 years of marriage.
James owned a heavy construction business. He agreed to split the
assets 50/50 and said that the CPA at work valued the business at
$300,000. Becky told her attorney, "I used to keep the books
in the business for James, and we took in more than a million dollars
each year. Do you think it would only be worth $300,000?"
Fortunately, Becky's attorney insisted that she have the business
appraised. The appraisal cost Becky $4,300, which made her very
nervous to spend so much money. But the appraisal valued the company
at $850,000 so her investment of $4,300 netted her $275,000 more
than she would have received with the $300,000 valuation!
In a divorce situation, it is almost mandatory to have the business
appraised. Becky was right to question the value of the business
when it was figured by the CPA at her husband's business. There
are Certified Business Appraisers (CBAs) who value businesses. To
earn this designation, appraisers must pass a rigorous written exam
and submit appraisals for review by a committee of experienced peers.
Dividing the Business
There are three options when deciding how to divide the business.
Either one spouse keeps the business, both spouses keep the business,
or they sell the business outright.
1. One Spouse Keeps the Business.
In Becky and James' case, it was pretty clear that the business
was run by James and he would keep the business and buy out Becky's
interest or give her other assets of equal value. If there are no
assets large enough to give her, they could write up a property
settlement note and he would pay her over time. If Becky owned shares
of the company, the company could buy back her shares over time.
However, care needs to be taken when buying out shares of stock.
If there has been an increase in the value of the stock, Becky could
be liable for capital gains tax. If James bought her shares directly,
it would be considered a transfer of property "incident to
divorce," which is not a taxable issue. The basis would go
with the stocks and would not be recognized until the stocks were
sold by Becky later on.
2. Both Continue to Work in the Business.
On the other hand, it is much more difficult to divide a family
owned business where the husband and wife have worked next to each
other every day for years. They both have emotional ties with the
business. In addition, if they try to divide the business, it may
kill the business. Some couples are better business partners than
marriage partners, and are able to continue to work together in
a business after the divorce is final. However, this won't work
3. Sell the Business.
Another option is to sell the business and divide the profits. This
way, both parties are free to look elsewhere for another business
or even to retire. The problem here may be in finding a buyer. It
sometimes takes years to sell a business. In the meantime, until
the business is sold, decisions need to be made as to whose business
it is and who runs it.
Stella and Dan owned a national franchise fast-food business. They
also owned the land and the building the business was in. They had
worked hard on this business together to make it a success. When
they divorced, it was a difficult decision but they finally agreed
that Dan would take the business and Stella would take the land
and building. This decision made Stella the landlord which allowed
her to control the rent that the business paid her and also how
repairs and maintenance on the building should be handled. They
soon realized they had made a bad decision. It cost them more money
with their attorneys to hammer out a new buy-out agreement which
allowed Dan to keep the business and the property, and gave Stella
enough cash to move out of the area and start over in a new location.
Value of a Degree
Some states even place a value on degrees such as the medical degree,
the dental degree, or the law degree. In a 1980 case, two premed
students got married. The couple agreed that the husband would finish
his education first while the wife supported him. When he finished,
she would then complete her education.
After his first year of residency, the couple separated. The court
held that the husband's medical school degree and license to practice
medicine were both obtained during the marriage, and therefore were
"property" and to be considered assets to be divided.
It established the value of the husband's medical education as the
difference in earning capacity between a man with a four-year college
degree and a specialist in internal medicine. With the help of a
financial analyst, the court valued the education at $306,000. The
wife was awarded, in addition to alimony, 20 percent of this amount
over a five-year period.
A 1982 case in Wisconsin called on an economist to establish the
value of the wife's investment in her husband's medical degree after
short marriage. The economist valued the degree in two different
ways. The first method looked at what the wife actually paid for
his tuition, books, etc., and came up with $25,000. The second method
compared the husband's earning potential in that area of the country
as a white male over a 25-year period, both with and without his
medical degree. The difference was $624,000, which was brought back
to present value using two different discount rates.
In this case, surprisingly, the wife asked for the $25,000 which
she thought represented the value of her support. The court granted
it, saying, "Both parties sacrificed so that he could become
a doctor. In a sense, his medical degree is the most significant
asset of the marriage. It is only fair that she be compensated for
her costs and foregone opportunities resulting from her support
of her husband while he was in school"