When couples divorce in Connecticut, and one or both parties own a share in a closely held business, this adds a certain complexity to the divorce proceedings. It is important to work with a family law attorney with extensive experience in the division of business assets in Connecticut divorces.
If my spouse and I own a business, how will this ownership interest be divided in the divorce?
In Connecticut, all assets owned by the two parties are subject to division and distribution to one or both spouses in a manner that the court deems fair and reasonable. This includes assets jointly titled to the spouses, assets in either spouse’s name, and assets owned by one spouse with someone else. Ownership interests in a business will be considered, along with assets such as real estate, financial investments, retirement accounts, and other property. In order to divide and distribute assets fairly, the court must understand the nature, history of ownership, and value of each of the assets.
How is the value of the business determined?
The court will determine the fair market value of the business, which is defined as what a willing seller who is not under duress would accept as a price from a willing buyer who is not under duress. The process of business valuation can be simple or complex, depending on the nature of the business. For instance, if one of the spouses owns a solo law or accounting practice, the process may be relatively simple. The enterprise value of the business is based on the continuing labor of the spouse-owner, and in many cases, it would have no value to a buyer. By contrast, valuing a car dealership or manufacturing company – with inventory, employees, and contractual commitments – will be a more complex process.
Business valuation is typically handled by a business valuation expert, in consultation with a certified public accountant, tax specialist, and family lawyer. The business valuator will analyze the financials and the business itself and determine a fair market value. You and your spouse can hire a valuation expert jointly, or you may opt to hire your own experts to obtain independent valuations.
What happens to the business after the divorce?
Once the business is valued, a determination must be made about how the asset will be divided. One option is for one spouse to buy out the other spouse’s interest, either with existing assets or through structured future payments. This option allows the business to continue running undisturbed. In some divorces, the spouses will opt to sell the business, with the proceeds divided fairly. In these cases, the value of the business will be determined by the sale price. In other situations, the spouses may opt to continue co-owning the business, with the rights and obligations of each party delineated in a court order that dictates how the business will be run after the divorce.
If you and your spouse established a business together without formal governing documents, and you cannot reach an agreement about who will run the business after the divorce, the court will have to decide. The court will consider evidence such as who has been responsible for the day-to-day operation and management of the business, whose idea it was to start the business, and other factors.
What if my spouse or I own the business with someone else?
It is not uncommon for a spouse to be a partner in a business with a third party. In some cases, one spouse is an owner of a family business that may have been in the family for multiple generations. If you or your spouse owns a percentage of a business with family members or other third parties, the governing documents of the company will be reviewed. The governing documents may restrict the owner-spouse’s ability to sell his ownership interest to the spouse or any other third party, and the court does not have jurisdiction to change a business’s ownership structure. If, for instance, you own 50% of a retail business with a partner, the court cannot assign your ownership interest to your spouse and order your business partner to be in business with your spouse, unless the governing documents of the business would permit that ownership structure even over the objection of the third-party owner.
When valuing your business interest, the court must assign an appropriate value based on whether you own a minority or majority share. Say the business is worth $1 million, and you own 49% of the business. Having a 49% share would not necessarily mean your interest is valued at $490,000. Buyers would be willing to pay less for a minority interest, which has diminished voting rights or control in the business. Conversely, if you own 51% of the business, your share may be worth more than $510,000.
In some cases, when one spouse owned an interest in a business prior to the marriage, the parties have a premarital or prenuptial agreement in place. The agreement typically addresses what happens to the business interest and/or additional premarital assets in the event of divorce or death. Courts typically honor premarital agreements, provided the agreement does not violate Connecticut statutes or public policy, and that the agreement was conscionable at the time you and your partner signed the agreement, and now when it is being enforced.
Why is it important to work with a family lawyer with expertise in business ownership interests in divorce?
Whether you’re the spouse who owns the business or the non-owner-spouse, it is important to align yourself with a family lawyer with extensive experience in divorces involving ownership in closely held businesses. The attorney will understand the intricacies of such business structures and will have the expertise to ensure that the business is valued correctly. If an opposing expert is advocating for a value contrary to your valuation expert’s finding, an experienced attorney will have the wherewithal to properly cross-examine the expert and demonstrate to the judge that the value you’re advocating for is correct.
The family law attorneys at Ruel Ruel Burns Feldman & Britt, LLC, have extensive experience serving as trusted advisors and representing clients in divorce involving ownership in closely held businesses and appeals in Connecticut. If you are considering a divorce or seeking a modification or appeal of your alimony, divorce or child custody orders, contact our family law attorneys at 860-206-9096 or online.