Does My Spouse's Business Have Value

Often in contested divorce cases one spouse either owns a business or is a partner in a business and the question comes up what is the value of the business or the interest of the spouse. The question is not easy except when the business really has no value. The value will play a part in asset distribution or equitable distribution. Below are some very general concepts that are discussed in these type of cases.

Sometimes a spouse will say that the other person has a business (lets say a painting business both commercial and residential jobs). The real question is how much money do they make after paying the operating expenses. In English what do they net before taxes. The next question is how much would they have to pay someone to do what they do. In other words if you had to hire an employee to perform your "job". If the answer is that the hired employee would earn similar to what you earn there is no value to the business. Why, because nobody would pay to buy the business and earn a similar income to what they could earn salaried. So if your spouse earns $100,000 net of expenses and would pay somebody $100,000 to do his job if the owner were absent, then there is no value for divorce purposes. If the spouse makes $200,000 and could hire someone for $100,000 then the business most likely has value because a buyer would have a chance to earn much more money than if he were an employee. Accountants call that "excess earnings over reasonable compensation".

The next question if there is "excess earnings over reasonable compensation" deals with the type of business and is it marketable or transferrable. For example if a person uses unique individual talents such as an artist or a songwriter it would be pretty difficult to "sell" the business as it cannot be sold. The person who makes it successful is the business. An artist can sell a studio and their paintings and so the works of the business can have great value (subject to appraisal) but the artist cannot sell his ability to paint.

In the situation of the house/commercial painter, the business may be marketable depending upon how the business is generated and whether the customers are hiring the painter or the business. When you need a plumber for an emergency you are hiring whoever can show up first. If you are painting your house or your business customers will shop price. If on the other hand you have contracts to do all of the work for a builder or banks or McDonalds then those contracts may be transferable to the new owner and then there is much value to the business.

Forensic accountants are often called in to review the records and financial documents to determine both business value and income to the spouse. The accountants will apply formulas to discount the business due to the possible lack of marketability, or that the owner is the key person and without that person the business loses value, they will also consider the market trends for the business.

Finally if the spouse is a partner the questions arise as to what percentage is the interest. Do they own more or less than half. What if they own 40% and nobody owns more than half? What are the terms of the partnership agreement regarding the withdrawal of a partner or the buyback of a partner's interest?

These divorce questions are quite complicated and it is important to have an attorney who understands these concepts and has worked with forensic accountants before so that they can understand the report.