Navigating through a divorce is a challenging journey, and it becomes particularly intricate when one or both of the parties has an ownership interest in a business. For entrepreneurs, a divorce is not just a personal transition; it’s an event that can have profound implications on their business. The process involves not only emotional and personal adjustments but also critical financial and legal decisions, especially concerning the valuation and division of business assets. Understanding how to approach these unique challenges is crucial for business owners facing the complexities of marital dissolution.

The Impact of Divorce on Business Owners

When a marriage ends, the division of assets becomes a primary focus, and this is especially complex for entrepreneurs and business owners.  Business assets (both tangible and intangible) are like any other asset in the separation and divorce process, and will be classified as marital, separate, or hybrid assets. Determining the classification of such assets requires a nuanced understanding of both legal and financial aspects.

One of the first steps in this process is determining the value of the business or business asset. In the context of the valuation of an entire business, this typically requires the input of a valuation expert, unless the entity has been recently sold or otherwise appraised. Further, Virginia courts consider a concept called “intrinsic value,” which is not necessarily just the value of the business on the open market. Concepts such as capitalization rate, goodwill, personal efforts, and minority discounts require more than just the client or even the lawyer’s analysis. As noted, an expert is particularly helpful in this regard.

Evaluating Your Business: More Than Just Numbers

The value of a business in a divorce, particular in a business active in the service industry, is often heavily influenced by the intangible assets. There’s an intangible element, often referred to as “goodwill,” that must be considered. Goodwill represents the business’s reputation, customer relationships, and other non-tangible assets that contribute to its future success, potential future earnings, and most importantly for this article, its valuation.

For divorcing entrepreneurs, it’s important to understand how this goodwill is assessed. The distinction between personal goodwill (attributable to the individual’s skills and reputation) and business goodwill (inherent in the enterprise itself) is crucial in Virginia. This distinction can significantly influence how the business’s value is considered in the divorce settlement. This can also only be truly assessed with an expert witness.

Distinguishing Personal and Business Assets and Expenses

One of the most complex aspects for business owners in a divorce is separating personal and business assets and expenses. The line between these can often be blurred, especially in cases where the business was established before the marriage or where personal funds have been invested into the business. Understanding which assets are considered personal and which are property of the business may not impact classification (marital vs. separate), however.

In many jurisdictions, assets acquired during the marriage are typically considered marital property, regardless of how they are titled. However, if the business predates the marriage, or assets both individual and business have been commingled, the situation can become significantly more complex. A thorough and fair valuation of these assets is crucial for an equitable division.

Unless both parties are owners of the business, a court in Virginia will not typically order a transfer of business interests, either in whole or in part. The court will typically order a monetary award to the non-owning spouse of his or her marital interest in the business in question. As a property right, this monetary award is wholly distinct from any support award the non-owning spouse may receive in this process.

In addition, the issue of personal vs. business expenses can be a complex issue. In Virginia, “gross income” is a very inclusive, defined term upon which child and spousal support depends. Virginia courts are required to deduct from gross income the reasonable business expenses for the self-employed, members of a partnership, or owners of a closely held business. While many such individuals can be quite cavalier in what business expenses they deduct for tax purposes, the Courts apply strict scrutiny upon such deductions if support is at issue.

For entrepreneurs, a divorce is not just a personal matter but a significant business event. The intertwining of personal and business lives means that divorce can have far-reaching implications for the business. It’s essential for business owners to approach this situation with a clear understanding of the legal and financial intricacies involved.

Navigating a divorce as a business owner requires a balanced approach, considering both the personal and business aspects of your life. Understanding the nuances of business valuation, asset division, and the role of goodwill can help ensure that your personal transition doesn’t negatively impact your business’s future.

If you have questions or need any assistance concerning guidance around divorce proceedings, please contact Christian Lapham at (703) 525-4000 or clapham@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.