One of the most complex aspects of property division in divorce is when one or both spouses own a business. The value of the business must be determined before equitable distribution of property can occur. Understanding how a business is valued during a divorce in New Jersey, whether it is separate or marital property, and how much of it may be subject to division, is essential for anyone who owns a business and is ending their marriage.
Business Valuation Approaches
In divorce cases involving businesses, forensic accountants are typically brought in to perform valuations. During the process, they review tax returns, financial statements, and bank records, and analyze trends in revenue, expenses, and profitability of businesses. They generally use one of the following valuation methods:
Income Approach
This method focuses on the business’s ability to generate future income. The forensic accountant reviews historical financial data and projects future cash flows, which are then discounted to present value using an appropriate discount rate. This approach is often used for businesses with consistent, predictable earnings.
Market Approach
The market approach determines value by comparing the business to similar companies that were recently sold. It works best when there are sufficient comparable transactions in the same industry and geographic region.
Asset-Based Approach
In this method, the business’s assets and liabilities are tallied to determine its net worth. This method is commonly used for businesses with significant tangible assets or where income and market data are not reliable.
Additional Considerations When Valuing a Business in Divorce
Valuing a business can involve other considerations, including tax implications, any recent changes in ownership or financial performance, and intangibles such as a business’s reputation and the loyalty of its customer base.
Once the valuation is complete, the accountant will produce a report describing their findings. Sometimes in divorce, each spouse will hire their own expert for business valuation and these experts do not always agree on value. In this situation, it is especially crucial to have the help of a skilled divorce lawyer who will help you in protecting what’s yours through negotiations or in court if the matter is litigated.
Determining Whether a Business Is Subject to Division
When it comes to your business in divorce, the key concern is whether it, or a portion of it, could be considered marital property. Here are factors that help determine whether a business is separate or marital property:
- When the business was started: If your business was established before your marriage, it may be considered separate property. However, if it grew significantly during the marriage or if marital funds or your spouse’s efforts contributed to the growth, the appreciation may be subject to distribution.
- Spousal contributions: Courts will look at both direct and indirect contributions of the non-owner spouse. For example, if your spouse helped run the business, handled the books, or sacrificed their own career to help support you and the business, these contributions may increase their entitlement to part of it.
- Commingling of assets: If personal and business assets were mixed—such as using marital funds for business purposes—it may transform separate property into marital property, at least in part.
If you owned the business before marriage and it retained its individual character without significant input or contributions from your spouse, it may not be subject to division. However, appreciation in value during your marriage—especially if due to joint efforts or use of marital resources—can be subject to equitable distribution.
There are many legal nuances involved in determining whether a business or a percentage of it is marital property. Your attorney can counsel you about what factors the court may use in considering the issue for your unique case.
What Is Your Spouse’s Share If Your Business Is Marital Property?
If the business (or its increase in value) is determined to be marital property, the next step is deciding how much of the business your spouse is entitled to. New Jersey courts look at several factors to determine how property is divided including when it comes to deciding the appropriate share of a business:
- Length of the marriage: Longer marriages typically lead to a greater share in marital assets, including businesses.
- Financial and non-financial contributions: This includes not only direct contributions to the business but also indirect support, such as taking care of the home or children so the other spouse could focus on the business.
- Economic circumstances of each spouse: The court considers each spouse’s financial situation, earning capacity, and needs post-divorce.
- Marital standard of living: Courts strive to allow both parties to maintain a similar lifestyle post-divorce, to the extent possible.
You can see the full list of equitable distribution criteria at N.J.S.A. 2A:34-23.1.
Protecting Your Business During Divorce
Business owners concerned about protecting their business interests in case of divorce have several options, including:
- Prenuptial or postnuptial agreements: A valid prenup or postnup can clearly define business ownership.
- Operating agreements or shareholder agreements: These agreements can include divorce-related provisions restricting transfer of ownership or setting valuation procedures.
- Segregating business and personal finances: Avoiding commingling helps maintain the business as separate property.
- Maintaining detailed records: Good financial documentation makes valuation clearer and helps defend against overestimation of value or marital contribution.
If your business or a portion of it is found to be marital property, you may be able to buy out your spouse or negotiate that they get other marital assets in exchange for you getting 100 percent of the business.
Contact An Experienced New Jersey Attorney When You Own a Business and are Divorcing
If you own a business and you’re going through or anticipating divorce, don’t hesitate to reach out to an experienced family law firm. The attorneys at [MFR] Men’s & Fathers’ Rights Divorce Lawyers in Hackensack will advocate for you through the valuation and property division process and develop a well-thought-out legal strategy to safeguard your business interests. Call (201) 880-9770 to arrange a confidential case evaluation.
