Owning a business during a divorce may lead to some contentious issues, especially when one person seeks to hold a stake in the company while the other chooses to relinquish control of his or her stake. Ordinarily, a spouse that wants to maintain control over the company will seek to value the business at a low amount while the other spouse seeking to give up control may want to value the business very high. For this reason, it makes it very difficult for both parties to agree on the valuation.
Here are some important factors to take into consideration when valuing a business:
Fair Market Value
According to the Internal Revenue Service (IRS) Ruling 59-60, fair market value of a business is defined as “the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge or relevant facts”.
Fair Value Method
Divorce courts in New York State use this method, which takes the base fair market value and applies it to the lack of marketability discount. New York courts treat business valuations of the spouse relinquishing control of a company as an “oppressed shareholder situation”. The reasoning is that small business profit and loss statements are usually not accurate because certain business expenses are unaccounted for such as a person’s expenses, perks, and other things. Therefore, the court will offset certain costs as reflected in a higher maintenance amount.
New York Courts often require an expert witness to testify regarding a business valuation. It is recommended that each spouse hire his or her own evaluator. However, expert witnesses can be costly.
In New York State a judge will determine the equitable distribution of assets if there is no prior written agreement between the parties. An equitable distribution refers to the separation of assets and financial responsibilities of the parties. This means that if one spouse is getting a business that is of high value, the court may give the other spouse the rest of the existing assets to offset the high valued business, among other methods.
While any divorce may become contentious, those involving the valuation and distribution of a business present complex issues. It is important to speak with an experienced divorce lawyer who can guide you through the legal process. The lawyers at Larry McCord & Associates, LLC have experience representing spouses in all aspects of matrimonial and family law litigation. The complexities of divorce and custody cases can be overwhelming and emotional. Contact Larry McCord and Associates, LLC at (631) 643-3084 to put an experienced Long Island divorce lawyer on your side.