What Happens to a Business in a Divorce?

People looking over contracts

A divorce can be a difficult and complex period of your life to navigate for reasons ranging from the deeply personal to the strictly professional. Some things fall into both categories–like the business that you and your spouse own together. What happens to a joint business in a Virginia divorce?

Businesses are classified as property under Virginia divorce law, the same as the house you share, your retirement accounts, furniture, heirlooms, and other assets. All these assets are brought to the settlement table.

Types of Property in a Virginia Divorce Case

The first step is to determine what type of property the business is. Property can be classified three different ways in a divorce…

  • Separate Property–This is property that was yours before the marriage or was received as a gift during the marriage (e.g., an inheritance). A key point, though, is that to be truly separate, the property must have been kept separate from the property you and your spouse share.
  • Marital Property–This is the property that is either titled jointly or was acquired by either one of you during the marriage.
  • Hybrid Property–As you might have deduced from the name, hybrid property is a combination of both.

A joint business is most likely to fall into either the marital or hybrid category. If you and your spouse started a business together after you were married, then this is a clear-cut case of marital property.

But what if you were the one who started the business? Now there are several variables the court will have to consider…

  • Were there investments made in the business after the marriage? If so, any increase in value that came from the infusion of property that was jointly owned will itself be considered jointly owned.
  • Did your spouse work in the business or in some other way provide value, and in turn depend on its success?
  • Was your business the primary source of income in a situation where the spouse stepped back from their own career to tend to other familial needs (e.g., raising children or caring for aged parents)?

Equitable Distribution of Property in a Divorce

The above examples are just a sampling of what a court will look at in determining a fair and equitable settlement. Which leads us to our next point. Virginia property distribution is required by law to be equitable, but not necessarily equal.

The difference can seem like semantics, but it can have a major impact in how property like a business is handled in a divorce. Property does not have to be split down the middle 50/50. The principle of an equitable settlement is simply that it be fair in the eyes of the court.

Virginia courts take a holistic look at a marriage in determining what constitutes equity. The original step of how property was classified will be an important part of that. So will how the day-to-day life of the marriage functioned.

Courts will take into consideration how long the marriage lasted. A longer-term marriage that lasted, let’s say, for 20 years, will likely see the spouses given greater responsibility to each other than a short-term marriage that ended after 3 years.

What might that mean for a business that you started prior to the marriage? First off, if you were married for 20 years, simple practicality makes it more likely that common assets were invested into the business and that your spouse jointly owns a piece of the business on that basis alone.

Or let’s consider the business that was started after the marriage. Legally, it belongs to both of you, but you were the one who put all the work in. An equitable solution will require the court to look at external factors. If you were putting the work in because they were raising the children, the court is more likely to consider the business as simply joint property.

But what if your spouse had their own career and was more or less indifferent to your business pursuits? You can make a strong argument that an equitable solution will put your business completely in your hands. Your spouse still has a valid claim because the business was started during the marriage. But it’s possible that their claim can be satisfied with the distribution of other marital assets.

All the assumptions we’ve made so far have assumed the business is profitable and at least reasonably free of debt. We hope that’s the case in your situation but be assured it would be quite normal if the business is carrying some financial liabilities. How will that work?

The same equitable distribution principle applies to liabilities. The main consequence is that who is arguing for what is likely to be flipped on its head. Your spouse is more likely to be looking for a way out, while you might be looking for some relief–especially if you can show that you started the business or quit a full-time job or took any other type of risk at your spouse’s behest.

There are as many possible examples out there as there are people. All of which is to say there is no reason to assume the court will order your business to be sold and the profits split 50/50 or to assume that your spouse will share ownership with you on a 50/50 basis. Those are possible outcomes, but certainly there can be several others that better fit the definition of equitable.

The wide range of discretion given to the court makes it all the more important that you have a divorce lawyer who can best make your side of the story heard.

How Valuable Is the Business?

Equitable distribution means the court must know the value of the business. This is much more than simply reporting annual gross revenue, although that is part of it. Proper valuation of a business also means looking at its assets, both short and long-term.

One factor that will be considered is how much real property the business owns. Real property is a term primarily used in real estate and it has great significance here. It presumes ownership of land, a building, or some other physical asset.

Let’s say you started an auto repair shop. Do you own the building that you operate out of or is it leased? That’s going to be a significant factor in determining the value of the business.

Maybe your business is low-overhead and can operate either out of the house or through a modest storefront. But perhaps something intangible serves to increase its value. Intellectual property, such as a patent or copyright, can be a valuable asset.

The value of your business will come down to much more than its market value, which is defined as the amount a willing buyer would pay to acquire it. So, The Commonwealth of Virginia has three different methods that can be used in valuation…

  • Asset Valuation–This method can be appropriate when valuing businesses like the auto repair shop we discussed above or other businesses that rely heavily on physical assets.
  • Income-Excess Earning–This method can be reasonably applied when looking at white-collar professional practices. Our own profession of law is one example, as would be accounting. The court will look at the income you’re earning as the owner of the business and compare it to the salary you might reasonably expect to make if you were an employee somewhere else. The amount over and above that expected salary is the excess–and under this method, the value of the business.
  • Market Valuation–As noted, the court does not have to use a straight market valuation, but it doesn’t mean that it can’t. Like with equitable distribution, the courts have the ability to be rigid and they have the capacity to be flexible. It’s up to your legal team to define your interests and persuade the court to pick the methodology that will lead in your preferred direction.

Divorce is not easy and settlement negotiations carry their own set of challenges. It’s certainly not something to go through aloneĀ and not something where you can afford to settle for second-best when it comes to your legal representation. Your livelihood and your future dreams are at stake. The Law Offices of Daniel J. Miller is experienced in cases like yours and tenacious in fighting for your rights. Call us today at (757) 267-4949 or contact us online so we can set up an initial consultation.

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