Dividing a Business in a Divorce Proceeding

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Dividing a Business in a Divorce Proceeding
Written By: Josh Lowell ~ 6/3/2024


Divorce is always a complex process, but it can be particularly challenging for business owners. When a marriage dissolves, not only do personal assets need to be divided, but so do business interests. Ensuring a fair and equitable distribution requires careful consideration of the business's value and income. Here’s are a few ways to understand this process and some steps you can take to protect your interests.

Understanding Business Valuation

The first step in dividing a business during a divorce is determining its value. This valuation is crucial because it influences the overall division of assets. There are several methods to value a business, including:

  1. Market Approach: This method compares the business to similar companies that have recently sold.

  2. Income Approach: This approach evaluates the business based on its potential to generate future income.

  3. Asset Approach: This method calculates the total value of the business's assets minus its liabilities.

Business owners can agree on a valuation method and the resulting value. However, disagreements often arise. In such cases, it might be necessary to hire a professional, such as a business accountant or a valuation expert, to provide an unbiased estimate. This expert will consider various factors, including market conditions, financial statements, and future earning potential, to arrive at a fair value. Note, however, that not all businesses have value. Depending on the type of business, even an expert might hold that the business itself (outside the labor of the owner) holds little to no value.

Division of Business Interests

Once the business's value is established, the next step is to decide how to divide it. Washington is a community property state, which generally means that assets acquired during the marriage are divided equally. However, this does not necessarily translate to a 50/50 split of the business itself. There are several ways to handle the division:

  1. One Spouse Buys Out the Other: One spouse can buy out the other's interest in the business, often using other marital assets to balance the division.

  2. Sell the Business and Divide the Proceeds: If neither spouse wishes to keep the business, they can sell it and split the proceeds.

  3. Co-Ownership: In some cases, ex-spouses may choose to continue co-owning the business, though this requires a strong, amicable relationship and clear agreements about management and profit distribution.

Calculating Business Income for Support

Another critical aspect of divorcing as a business owner is determining business income for calculating spousal and child support. Courts will consider the business's profitability and the owner's income derived from it. This calculation can be complex, particularly if the business expenses are intermingled with personal expenses. An accurate assessment requires:

  1. Reviewing Financial Statements: Detailed financial records are essential to separate personal and business expenses and determine the true income.

  2. Adjusting for Non-Recurring Expenses: One-time expenses or extraordinary costs should be excluded to reflect the business's regular income accurately.

  3. Considering Industry Standards: Comparing the business's financial performance to industry benchmarks can help establish reasonable income expectations.

Both parties may need to engage financial experts to ensure the income is calculated fairly and accurately, which will impact the amount of support awarded.

Divorcing as a business owner involves unique challenges, but with careful planning and professional guidance, it is possible to achieve a fair and equitable result. If you are facing a divorce as a business owner, consulting with an experienced divorce attorney and financial professionals can help protect your interests and facilitate a smoother transition. Call the law offices of Magnuson Lowell PS today for a free telephone case evaluation 425-800-0572

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