What happens to a business in a divorce?

When a marriage ends, the divorcing couple must decide how to divide the marital assets. Unless otherwise outlined in a pre-or post-nuptial agreement, all assets acquired during the marriage are considered marital assets under Rhode Island law. This includes money as well as personal property, stocks, real estate, debt, and business interests. It can even include the increase in value of assets, during the term of the marriage, which were owned pre-maritally.

The division of assets can be a complex and emotional process, which is why experts are needed, especially when a business is involved. Each spouse typically hires their own Business valuation experts to present the business value according to their individual goals.

In Rhode Island there is a difference between enterprise goodwill and personal goodwill. Personal good will is considered unique to the individual and not divisible. Typically these are the business of Doctors, lawyers, accountants etc., where the entire value of the business is the services provided by the individual. However independent business value, regardless of the individual, is divisible. Often these are things like restaurants, car dealerships, and retail establishments.

When you have a business with enterprise value, often it is not immediately apparent what the actual value of the business is. In this case we generally use three approaches to value a business. The most common approach is the income approach, which attempts to assess expected economic benefits. Historical financial business data is used to calculate projected benefits. The final outcome also considers potential risks that could negatively impact such benefits.

Another approach may assign a total value to business assets; this is known as the asset approach. Tangible assets—those related to the management and operation of the business—include cash, inventory, and equipment. Intangible assets, on the other hand, involve rights to business trademarks, patents, or copyrights. Liabilities will be subtracted from the assets to determine a final business value.

The third approach compares similar businesses which have been sold to determine a market value. While this approach considers recent transactions to evaluate the business worth, transactions involving sold businesses may result in valuations that are too high or even too low for the business in question.

With so much at stake when valuing and dividing large marital assets, such as a business, it is essential to seek legal and other professional guidance to protect your interests during a divorce. For more information about evaluating your business, contact our office today.