Most businesses in this country are family-owned mom and pop shops that run on the back of dad, mom, or both husband and wife. Whether the business is under the husband’s name or the wife’s name, the other spouse is likely helping in some shape or form. It may be difficult to determine how much a family took home from their business, especially when business owners aren’t paying themselves or income is earned informally.
Regardless there are many ways to valuate a couple’s business in Alpharetta upon divorce, but our attorneys are here to help. Let our team assist you in determining the value and ownership of certain business shares and interests.
Not having a consistent paycheck can make things more ambiguous, ultimately causing the divorce process to go on longer, creating conflict, and driving up your attorneys’ fees. It is therefore advisable to put yourself on payroll, and if your spouse provides any service to the company, they should be added as well.
Taking distributions from the company is not the same as collecting wages. Distributions are taxed differently than if you’re paying yourself wages. If your business is an S corporation, for example, and you have a salary, but you’re also the owner, that salary is going to be subject to FICA taxes.
Whether you’re putting yourself on payroll, or it’s just a general partnership, making sure that you have guaranteed compensation is key to dividing assets in the event of a divorce. By putting yourself and your spouse on payroll, you can look back at records from the moment that divorce is filed and determine how much you and your spouse were paid every year for the last four years, for instance. This shows the court what those services were worth.
Furthermore, a spouse who is not necessarily the owner but is helping out the business without being paid could later argue in a divorce that they put equity into the business just as the owning spouse did and should therefore be treated as a co-owner in their case. To the court, it looks more like they’re contributing as an owner versus another salaried employee.
In the case of a family-owned business, one spouse can sell their interest in the business to the other if they were co-owners, or they can sell the business altogether. The question then becomes, how much is the business interest actually worth?
The owners can either agree on its value in the operating agreement or have a third party who wants to acquire the business value it through comparables. Depending on the industry, type of business, and what growth stage it’s at, the third party will be using various valuation methods to do that.
Divorcing business owners have several options for determining the value of their company. First, which is the most flexible, is using fair market value. This is similar to what the third party would be looking at to valuate a privately owned business in Alpharetta.
Second would be Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which may require several analyses before getting a big-picture business valuation. Ultimately, the growth stage of the business and the industry in question would determine the method of valuation.
The owners of a business can meet every year to set a value per unit or per share. Once you set that value, it’s very easy to do the multiplication for units or shares you own.
The value reflected in your company’s financial books, which doesn’t typically include good will, would determine the worth of your business or shares. In the case of an adjusted book value, you can use a specific formula to determine the value.
There’s a variety of other ways that you can agree on how your business or shares should be valued. There may be discounts, for example, if you or your spouse are a key employee or member and are being disassociated. The service to the company may have been so critical that if you based the value the day before you or your spouse were disassociated, you could argue that the value is going to be decreased substantially the day after.
It is advisable to incorporate into the operating agreement some sort of reduction on the buyout price for such situations. It is important for any preemptive percentage reduction from fair market value to consider the fact that that particular owner is no longer going to be involved in the business and can no longer contribute thereto.
In the divorce context, the courts are going to be looking at the operating agreement. Any interest that is considered part of that marital estate is dealt with through the operating agreement and its buyout provisions. Judges would likely defer to the operating agreement because it was made before divorce was ever contemplated.
However, not all family businesses operate so formally. For example, some families are dependent on business income earned through giving services based on the good will of a contact list they’ve created for their own name and their own body of work.
If one spouse is responsible for the business in a situation like that, the business should probably stay with them. Furthermore, anything earned from that business would likely be awarded to the spouse who owns that contact list. Both spouses’ business interests would still need to undergo a valuation to figure out what each party would be paid for their share.