Equitable Distribution: Closely Held Corporations, Partnerships, and Professional Practices in New Jersey Divorce
In a high asset or high net worth divorce, resolving ownership issues and addressing the potential equitable distribution of a business or a business’s value can be major issues. When one spouse owns and operates a business, the first question is usually whether or not the business is wholly or partially marital property. If the answer is yes, then the divorcing spouses will probably require a formal valuation and report to allocate the value between them. Even when a business is entirely separately owned, the income stream may need to be assessed for the purpose of resolving alimony or child support claims. Valuation of the business as an asset and analysis of the income stream are separate but related issues.
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Businesses as Separate or Marital Property
If one spouse started a business, entered into a partnership, or opened a professional practice prior to marriage, the enterprise will remain a separate asset. If the business enterprise began after the marriage, on the other hand, it is a marital asset. The start-up date, however, does not end the question of whether or not part of the value of the entity might be subject to equitable distribution in divorce. A “passive” increase in value remains separate property. Any increase in value that results from the “active” efforts of either the owner or the spouse during the marriage, however, generally becomes marital property subject to distribution.
Active Contributions to a Separately Owned Business
A passive increase in value is appreciation that results solely from economic forces. For example, if shares of separately owned stock triple in value while the owner does nothing but hold those shares in a brokerage account, the increase is passive. If, however, the stock of a closely held company appreciates in value due to the active efforts of the owner, that is considered an active increase. Active efforts include personal activity and financial contributions. While the spouse of a business owner sometimes has a claim to increased value due to direct participation in the business, such participation is not necessary. A court can still find that the spouse’s activities as a marital partner—homemaker, parent, or companion—assisted the owner’s ability to work in the business, thereby making the active increase in value the product of the couple’s joint efforts.
Distributing the value of a business fairly usually requires a formal valuation and report. A business owner claiming a separate interest must determine the fair value of the business as of the date of the marriage, and then again as of the date of the divorce. If the business is separate property, but part of the increase in value is marital property, then the valuation can include a calculation of the appropriate spousal share.
Divorcing spouses can hire joint or separate forensic accountants or actuarial experts to determine a business’s fair value. Business valuations are complex and it is not uncommon for different professionals to employ different methodologies and reach different conclusions. It is important, therefore, whether choosing a separate or a joint evaluator, to have a thorough understanding of the evaluator’s methods and reputation before making a hiring decision. An experienced family law attorney can help you choose the right expert for your needs.
The process of business valuation typically includes a thorough inspection of the business site and records, including general ledgers, payroll registers, receivables, machinery, inventory, real estate, client lists, and partnership interests. The analysis will include a valuation of enterprise and personal “goodwill,” in addition to dollar value. Goodwill is that part of a business’s value that comes from things like personal reputation, a higher than average skill level, a great location, or the employment of particularly capable staff. “Personal” goodwill requires the presence of a specific individual. “Enterprise” goodwill is associated with the business in general. Goodwill is not tangible, but it is can greatly affect a business’s worth.
Determining Fair Value
New Jersey courts generally use “fair value” rather than “fair market value” when assessing businesses for distribution in divorce. Fair market value represents the anticipated price an asset would garner in the open market, whereas fair value considers the value of the asset to the holders, which could be either greater or less then fair market value. Fair value is sometimes defined as fair market value minus certain discounts. These include marketability discounts, which reflect a decrease in value due to the time it might take to sell a business, and minority interest discounts, which reflect a decrease in a business’s value due to a particular owner’s lack of control resulting from ownership of less than 50% of the voting interest.
The general principle applicable to New Jersey equitable distribution is that the value ultimately ascribed to an asset must be fair to both spouses. It should not be oppressive to the owner spouse, nor should it deprive the dependent spouse of fair compensation for the marital efforts that contributed to the success of the enterprise. The goal is a fair sharing of the financial successes of a marriage. A skilled family law attorney can make arguments in your favor regarding value, whether you are an owner spouse who wants to keep a business without losing a large portion of its value, or a spouse who is depending on receiving a fair share of the business’s value.
Equitable Distribution of Businesses in High Net Worth Divorce
Even where there is a business at stake in high net worth divorce, New Jersey’s equitable distribution statute lists the factors that govern the fair division of assets and liabilities in divorce. Most divorcing couples prefer to assign a business to the most involved party after divorce, rather than continuing to run it together. Finding a way to keep a business operating without major financial loss from divorce is critical for professional practitioners or highly skilled business owners. If one party owned a business before marriage, or if a business is dependent on the skills of one party, a court will generally award the business entirely to that party, but may make a compensating award to the other party for any marital portion of the business’s value. The owner can then buy out the spouse by balancing the compensating award with other assets, or if necessary, by setting up some kind of payment plan, such as an annuitized settlement or another type of distributive arrangement.
Whether you are interested in selling your business or continuing to run it post-divorce, our experienced New Jersey Divorce lawyers can help you develop the right arrangement. If you have questions about valuing or dividing a business in divorce, contact us today to schedule an initial consultation.
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