Business assets are a complex challenge in a Louisville area divorce case. Kentucky divorces involving large, substantial assets, retirement accounts and pensions, as well as professional practices or privately held companies, by their very nature, carry significant financial, legal, and tax implications for your divorce. An ownership interest in an LLC, S corporation, C corporation, or a professional practice will require considerable planning and the extensive experience of the divorce, tax and family law attorneys at Dodd & Dodd Attorneys, PLLC.
What happens if the spouses hold joint ownership of a business interest? Generally speaking, the options are too numerous to evaluate here, but the principal options available to the parties include:
- The sale of the marital interest in the company or professional practice
- The spouse who wishes to keep the business asset must “offset” the marital interest of the other spouse with funds or other marital property of their own
- The company either obtains financing or applies existing cash or assets to “buy out” the other spouse
- The parties are able to continue to work together in the future and keep the business or professional practice (note: this usually requires planning and the specific establishment of each marital interest or percentage of ownership from now on)
Business assets are a complex challenge when only one of the spouses owned the company separately prior to the marriage. If the financial interests of the company have been kept entirely separate from marital funds at all times, and the other spouse has not contributed any labor or asset that would increase the value of that company, the business or professional practice may remain the “separate property” of the original owner.
If the professional practice or business is in whole or in part a marital asset, the most straightforward option is to sell the business and divide the marital property portion of the company equitably. Most business owners wish to keep the company or practice through and after the divorce process. Therefore, the first step in the process is to establish the nature of the business asset (marital, separate, or commingled). If any portion of the company is determined to be a marital or commingled asset, the other (non-owner) spouse could have a potentially significant marital interest in that asset.
Business assets are a complex challenge in a Louisville area divorce case as the parties work through the characterization of the asset. The next step in the process of any marital or commingled business asset in a divorce is the valuation of the business interest and a determination of the actual value of the non-owning spouse’s marital or commingled interest in that asset.
A valuation can be established through a market valuation, asset valuation, or the factoring of the company’s income. Experts are often employed by either or both sides or the Court itself to assist in the valuation process. If several similar companies or business interests have been sold here in Kentucky in the past few years, a “market valuation” might be the best process to establish the asset’s actual value. If the business is based upon substantial assets (such as investment real estate), the value of the assets, less the amount of any liens, loans, or liabilities, would be established in an “asset valuation.” Private and more unique businesses are often valued using the company’s annual income multiplied by the appropriate factor for that type of asset. For example, if the yearly EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is $1,000,000, the expert may use a common factor of five times EBITDA, or $5,000,000, to establish the “income valuation.”
One of the reasons business assets are a complex challenge in a Louisville area divorce is the competing interests of the parties when it comes to valuation. The owner of the company wants the lowest possible valuation. A low valuation means the owner will have to “offset” a much lower amount of marital property to achieve outright ownership of the business during and after the divorce. The non-owning spouse obviously wants the highest possible valuation, as they will receive a much higher value for their marital or commingled interest in the business asset.
Once the marital and/or commingled interest in the business is established, the owner must “offset” or buy out the other spouse’s interest as part of the marital property division process. This can include their portion of the equity in the family home or other assets, retirement holdings, cash on hand, or other marital property.
Is the business or professional practice a separate asset, a marital asset, or a commingled asset? What is the valuation of the business? What is the marital interest of each former spouse during property division? How will the business owner offset the other party’s property interest in order to gain sole ownership of the company in the future?
This is why business assets are a complex challenge in a Louisville area divorce case. If you own your own company, or you and a former spouse share any interest in a business or professional practice, you are going to need an experienced, proven divorce, tax, and family law attorney from Dodd & Dodd Attorneys, PLLC.
We invite you to review the strong recommendations of our former clients and the legal industry and contact Dodd & Dodd or call 502-584-1108 to schedule an appointment with one of our attorneys.
