Dividing Small Businesses In Divorce
Dividing small businesses in divorce can be difficult, complex and of course contentious. This is usually because the business is the family’s largest asset, and the parties may have very different views about what it is worth, as well as their respective shares. One party may believe that the business is failing and is only a fraction of its perceived value, whereas the other party may insist that it is a budding enterprise that is worth much more than is being explained. These views can be especially difficult if only one party primarily owns or operates the business, for the other may believe that they are being denied their fair share of the proceeds.
When emotions drive each party’s sense of entitlement, costly litigation is a certainty. However, the following tips can help parties properly value a business, determine how it should be divided in divorce and avoid further acrimony over their rightful share.
First and foremost, it is important to understand the difference between a business as “property” as opposed to “income.” A business labeled as property (such as a rental property) is subject to Illinois’ asset division laws and will be divided as such. A business known for its income (such as a doctor’s private practice) will invariably lead to spousal maintenance payments based on the revenue produced by the business. Some businesses may be considered both “property” and “income.” In these instances, the two must be separated to avoid double dipping (i.e., dividing the business and then paying maintenance based on the income from it).
Also, finding the valuation method appropriate for your business is critical. The fair market value method assesses a business’ worth by determining what it would sell for on the open market. Essentially, a valuation is reached by comparing values of similar businesses or comparable sales. Some businesses are valued through the capitalization of earnings method, which considers the business’ prospective rate of return, its history of earnings and the risks involved. Regardless of the method used, the higher the business value, the more each party stands to receive.
Ultimately, dividing a small business can be a very complicated process. An Illinois divorce attorney with a business background can advise you on what method would be appropriate for your business.