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What is the best way to protect the business in a divorce?

On Behalf of | Feb 25, 2022 | Divorce

Hoosier business owners know how important it is protect their professional interests, especially during a divorce. As it often forms the largest portion of a couple’s marital assets, a business is also at greatest risk during a divorce proceeding.

Unless they have taken steps to keep it intact through a prenup, a shareholder agreement, or other means, the business may not survive divorce if it goes on the chopping block. As Indiana is an equitable division state, all marital property is subject to marital asset division that is fair, but not necessarily equal. As this applies to the business, the court may consider any increase in value of the business or debt during marriage as subject to division.

A business valuation offers a clear view of the value of the enterprise and the financial implications of property division. But it can get complicated, so it can help to have a financial expert to look at all parts of the business, its performance, net worth and investment-related proceeds.

Which valuation is best for my business?

The stakes can be high when determining the value of the business, which is why both spouses may hire a professional to conduct the valuation. Outside of its organizational structure, the three main ways of evaluating a business are:

  • Assets against liabilities, which is often complicated for small businesses that have not only big expenditures for vehicles or computers, but also office equipment and other office inventory.
  • Market analysis, in which the value of the business is determined by comparing it to similar-sized businesses that have recently been bought or sold. It is the least-often used valuation method used, as small and medium-sized businesses are relatively small and often have a niche that make them difficult to compare.
  • Past and projected revenue, which focusses on cash flow and profits, including proceeds from investments, to determine value.

Because a complex divorce proceeding can go on for a long time, timing the valuation close to the date of the hearing will offer the most accurate snapshot of the financial health of the business.

How other factors influence property division?

The business structure can also influence how the court will decide on property division. In a sole proprietorship, the business will likely be split down the middle. For a corporation with shareholders who receive dividends, these assets will come into consideration during the evaluation. And the valuation of a limited liability company is guided by state law.

Even if the business started up before the marriage began, the other spouse may have an interest in it if they used marital assets or debt to finance the enterprise. The court may also decide that the other spouse has a stake in the business if they owned shares of if they contributed in non-financial ways, such as supporting their spouse by taking care of the household or raising a family.