Anytime a married couple decides to end their marriage, the marital assets and debts must be divided during the divorce proceedings that follow that decision. When a business is involved, the process of dividing debts and assets often gets complicated. To give you an idea of what to expect when a business is involved in a divorce, a Murfreesboro divorce lawyer at Bennett | Michael | Hornsby explains how a business is valued in a Tennessee divorce.
Divorce Basics: Dividing Debts and Assets
Part of the divorce process in Tennessee is the division of marital debts and assets. Separate property, including assets owned prior to the marriage or inherited during the marriage, remains the property of the owner. When it comes to the division of marital assets, Tennessee is an “equitable distribution” state, meaning that if a judge must determine the division of assets, it will be a just division, not necessarily an equal division.
Is a Business Marital Property?
When one party already owns a successful business prior to the marriage, it is wise to sign a prenuptial agreement to make it clear what happens to the business in the event of a divorce. In the absence of a prenuptial agreement, whether the business is marital property will depend on several factors. The fact that one spouse owned the business prior to the marriage does not, by itself, make the business separate property. If the other spouse contributed to the operation and/or growth of the business during the marriage, at least of the value of the business may be considered marital property. If the business was started after the marriage, the entire value of the business will likely be counted as marital property; however, only an experienced Tennessee divorce attorney can evaluate the relevant facts and provide you with guidance on whether a business is marital or separate property.
Determining the Value of a Business in a Tennessee Divorce
If the business is counted as a marital asset, the value of the business will need to be determined. Even if one spouse clearly plans to continue to own and operate the business post-divorce, the other spouse will be entitled to part of the value of the business in the divorce. Typically, a professional valuation is conducted by both parties to try and determine the value of the business. There are three common methods used to value a business:
- Income-based. Valuing a business using the income-based methods involves focusing on the businesses future earning capacity. This is a desirable approach if the business is young but healthy and is likely to continue to grow in the future.
- Market-based. This approach views the business in much the same way as a house is viewed when conducting an appraisal by comparing the business with similar entities that have sold recently. This method is only practical if there are a sufficient number of similar businesses in the area that have sold recently.
- Asset-based. This method of valuing a business focuses on the business’s assets, including cash, equipment, products, and goodwill in the community. As you can imagine, this method can be difficult to use if the business is a service business.
Regardless of the method used to value the business, you can almost count on a disagreement regarding the value. One spouse will want to undervalue the business while the other will want to overvalue the business. While it is not unheard of for two divorced people to continue to operate a business together, in most cases one of the spouses will end up with the business after the divorce while the other will end up with a percentage of the value of the business. If you are contemplating divorce and a business will be involved, it is in your best interest to consult with a financial advisor and a divorce attorney as early as possible to ensure that you understand how the business will be treated during the divorce.
Contact a Murfreesboro Divorce Attorney
If you have additional questions or concerns about how a business will be valued in a Tennessee divorce, consult with an experienced Murfreesboro divorce attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.