Surviving a divorce

The owner of a closely-held corporation or family business is not immune from the statistic that more than one-half of marriages end in divorce.

As a business owner, you should know how your business will be valued and allocated in the divorce.

Wisconsin is a marital property law state, which most people understand to mean a community property law state.

If you acquired or improved a business or if the business appreciated in value due to the labor of either spouse during the marriage, it is likely that the business will be a divisible asset at divorce, at least in part.

The family court will start with the presumption that all of the property in the marriage should be divided equally between the parties. This includes your business.

This can be a very hard pill to swallow for the business owner who was personally engaged in the business during the marriage.

Wisconsin law assumes that the efforts of the nonowning spouse and his or her contributions to the marriage allowed the owning spouse to dedicate the time, labor and creativity to the successful operations of the business and thus should share in the value of the business.

The business is an asset in the divorce and a value must be assigned to it.

Disagreement on value

The party who relies on the business as the sole source of income and wishes to continue with the business after the divorce may contend that the business has minimal value.

The other party who is not engaged in the business but is requesting one-half of the value of the business, will generally argue that the business has substantial value.

Each party will benefit greatly by having an expert value the business. If it is an amicable divorce, the parties could save significant money by hiring an expert to perform a neutral joint valuation of the business.

The expert is generally either a Certified Public Accountant for smaller businesses or a Certified Valuation Analyst for larger businesses.

A reputable divorce attorney will know which expert to hire and usually has a working relationship with several experts in the area.

The expert will be responsible for determining the fair market value of the business. In other words, the expert will determine the price a willing seller and willing buyer would agree to use if both had reasonable knowledge of the relevant facts and neither was under any compulsion to buy or sell.

Documents that will be reviewed, but are not determinative of value, are tax returns, buy-sell agreements and financial statements prepared for business loans.

No barometer on value

A unique aspect of valuing a closely-held corporation or family business involves discounts and premiums. Unlike a publicly traded business where a person can easily identify the value of his stock, a private company has no such barometer.

A spouse who owns 49 percent of a business with another partner does not necessarily have 49 percent of the total value of the business.

For example, assume a business is owned by two partners with Partner A owning 51 percent of the business and Partner B owning 49 percent.

Partner B files for divorce and the expert determines the total value of the company to be $500,000. Partner B's interest is not $245,000.

Rather, a discount must be applied to his share since he does not have control over the decisions of the business. This is known as a minority discount which can result in a depreciated value of anywhere between 15 to 35 percent depending on the type of business.

On the other hand, if Partner A were divorcing, the value of her interest would be greater than half, given the premium of control.

Because it is not as easy to sell an interest in a family business or closely-held corporation as it is to sell public stock, the expert may discount the party's interest in the business for a lack of marketability.

Once the value of the business is determined, the divorcing couple must find a way to provide payment to the spouse who will no longer be involved in the business. The most practical way is to award other assets to the non-involved spouse to make up the difference, such as the home or investments.

If these other assets are not available or do not rise to the level of the business interest, the spouse keeping the business can make payments over time with interest to the other.

The least likely, but not necessarily unheard of, scenario is to divide the business assets between the spouses or even have the spouses retain ownership in the business together after the divorce.

Draft an agreement

A business owner may be able to keep his or her business out of the divorce by executing a Marital Property Agreement.

A Marital Property Agreement signed prior to the party's wedding is known as a prenuptial agreement.

A Marital Property Agreement signed after the wedding, even years later, is known as an postnuptial agreement.

Commonly used for many years by the very wealthy, this document is now being more readily used by business owners.

The bottom line: A business owner must realize that his or her business is an asset that could be divided at divorce.

The best way to protect the business from division at divorce is to enter into a Marital Property Agreement that is fair and equitable to both spouses.

Christopher Krimmer is an attorney at Balisle & Roberson in Madison.