In the previous blog post, we began to talk about the issue of dividing a closely-held business in the process of a divorce. The first matter discussed was whether the business would be considered marital property under Pennsylvania law. If the business was established before the marriage, then the more salient issue is going to be what the value of the business was before the marriage (when it was separate property), and what the value of the business was during the marriage (when it was marital property).
This gives rise to the question that can be just as important as the issue of when the business would be considered marital property, and that is how the value of the business is going to be established. As any business owner knows, there are many ways of looking at a business and putting a value on it. That is why the valuation process in a divorce is crucial for both divorcing spouses. If one spouse is allowed to use an unfair valuation, it can create a very unjust division of property.
With assistance from attorneys and other professionals, the value of the business can be determined at the time of the marriage and the time of the separation. With these figures in hand, an equitable division can be determined. It may be that the business will be sold and the proceeds divided between the parties, but that is not necessarily the best outcome for either divorcing spouse. Another possibility is that one spouse will have full ownership of the business, and the other spouse will receive money or other property equal to the value of their marital share in the business.
As in most things, it is better to address property division issues earlier rather than later. Ideally, the fate of a business would be determined prior to a marriage, and made official in a prenuptial agreement. Even during the marriage, such an agreement can be reached. However, courts will be suspicious of any agreement that is made after the marriage has begun to deteriorate. That is why early agreements are best. They have the strength of having been agreed to when the marriage itself was strong.
Source: Forbes, “Five Steps a Woman Can Take to Help Her Family-Run Business Survive Divorce,” Jeffrey Landers, Nov. 15, 2011