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Protecting Your Business in a Divorce

Dividing a Business in a Georgia Divorce
Equitable division does not mean an equal division.  In the case of divorce in Georgia your business and practice can be considered for equitable division between the spouses. Any type of business that is referred to a “closely held” such as a partnership, LLC, professional practice, and or corporation that’s shares are not publicly traded can be considered a marital asset during a divorce proceeding. Even if the business was initiated prior to the marriage the business can still be viewed as marital property depending on the spouse’s contributions to the business and how the business was utilized during the course of the marriage. “If the business appreciated during the course of the marriage due to labor or other financial efforts of either spouse, then the appreciation is considered a marital asset and therefore subjected to equitable division; whereas, appreciation due to strictly market is not considered a joint marital asset (Sullivan v. Sullivan, 295 Ga 24 757 S.E. 2nd 129, 2014).”

However, if the business is small and is solely owned by a single spouse and is does not have incorporated assets and is dependent solely upon accrued revenues from labor of the sole proprietor then the value may be limited to the extent of being considered marital property. In the case of Zekser v. Zekser Ga, 2013, the courts found that the business had no intrinsic value, the husband was the sole employee, and the business only maintained one client. Due to these facts and the fact that the business’ assets were not incorporated it was not worth the time of the courts to equitable split the business for lack of profitability. Each small business case is assessed for consideration on equitable division on an individual case by case basis.

In the event that it is found the business is deemed to have intrinsic value then it may be necessary to have an expert witness analyze the financial state of the business, ownership terms, present value, any shared interest, and any financial transactions taking place up until the date of the final hearing. The value of the business is determined by experts using the following criteria:

  • the income or capital earning methods,
  • the approach of marketing business,
  • the cost of marketing the business.

When assessing a business for equitable distribution then the judge has the authority to determine which approach the expert should take when determining the value of the business (Sullivan v. Sullivan Ga, 2014).

In some very rare cases it may be possible for both spouse to maintain the business together post-divorce. If this is the case and the parties are able to demonstrate that they can amicably run the business together despite the divorce or the shared ownership interest then the business will be fully awarded to the spouse that initially maintains and operates the business. However, if intrinsic value is present then the sharing spouse will be awarded co-ownership as of the date of the settlement or final hearing for the divorce. The business may also be considered a marital asset and the court may in turn award business based alimony to the non-owning spouse (Miller v. Miller Ga.274. 705 S.E. 2nd 839, 2010).

Evaluations and Goodwill
Evaluating a business for equitable division is costly and should only be pursued if it is though that the business is of intrinsic value to both spouses. In order to conduct a business evaluation then the party seeking the investigation must subpoena all the business records or obtain the business records for the business. It is not uncommon for the other party or other co-owners to object to the release of financial documents making it difficult to complete the evaluation. Usually the initiation of the discovery process for the divorce and the use of subpoenas will obligate the other party or non-party to furnish the necessary documents and financial records .Once the records are obtained then you may hire an expert witness i.e. a business evaluator to begin the analysis of the business in question.

Most business evaluators charge hourly and will be required to spend hours if not days analyzing the business. Once the have made a final report of their findings the will be able to testify in court as to their findings for the equitable division of the business. If the business evaluator is appointed by the court then the evaluator may make recommendations as to the division of the marital property. Again, the cost of hiring a business evaluator, having them assess the business, and having them testify is exceptionally expensive and may cost the party seeking the investigation thousands of dollars.

What will the Business Evaluator Look For?

Tax Returns
A business appraiser will use at least the last five years of tax returns and financial statements when analyzing financial statements.

Book Value
An appraiser will try to develop a range or monetary number based on conservative estimates for the business; also referred to as the book value. Book value may include personal luxuries such as company vehicles, boats, planes retirement plans, country club dues, loans, travel expenses, entertainment expenses, and payroll expense. The book value will demonstrate to true value of the business aside from inflated claims by the estranged spouse or deflated claims by the owning spouse or attempts to conceal the business intentionally.

Marketing Discounts
An appraiser will determine all true marketing discounts within the business. A marketing discount is a reduction to the business value because of lack of buyers, clients, profitability. Marketing discounts may include the liquidation of assets due to the lack of business. Furthermore, marketing discounts may include reductions to stock shares. Considering all discounts possible the overall discounts have the capacity to reduce the value of most businesses, “by as much as 75%.”

An appraiser will also have the ability to determine the company’s ability to accrue capital/ good will. If you are able to maintain better business prospects than your competitors then this goodwill, reputation, and service may also be considered in the value of the business.

Proposing an Equitable Settlement
Once the business evaluator has reported their final report a copy should be presented to the other party during and prior to the time of negotiations. A percentage of the business determined by the value should then be offered to the opposing party. The business can then be transferred to the other spouse in a variety of ways i.e. through real estate, stocks, bonds, or cash accounts. It is possible to therefore settle the intrinsic value of the business with the other spouse without having to close the business—in fact it is possible to keep the entire business in tact if you are resourceful enough. It is also possible to make long term payments to the other spouse via profits –business alimony. Another option allows for you to make payments through life insurance to pay the equitable distribution of the business. Any amount afforded however should reflect the post-tax amount.

Professional Practices
If your business is to provide a professional service; such as law, medicine, accounting, etc. then you may have difficulties on the basis of not only your practice, but on your future earning capacity – which will be associated with value. Your earning capacity can be included as a marital asset so long as it was built during the course of the marriage. It is not uncommon for a spouse to claim that their responsibilities through house management, and child care assisted you in your ability to form your practice and acquire a degree/ license. Anticipate values of capable earning may be assigned and discounted by your work expectancy and current values to determine your future earning capacity. The only way to avoid making practice alimony in turn is to hire professional legal counsel to argue the spouses claims or to devaluate your current income.

Almost all assets in a divorce can be quantified if they have intrinsic value and so long as they have intrinsic value they can be subjected to equitable distribution. Your business ad practices can also therefore be subjected to equitable distribution. If you are intending to get a divorce or have been served with divorce paperwork and intend on retaining your small business then you should consult with a family law attorney with financial business experience to handle your divorce claims. The attorneys of the Coleman Legal Group, LLC are capable of handling your business related divorce case. Call  us at 770-609-1247 to have your case reviewed today.