How is a business split in a divorce in Indiana?
Business owners always have many questions for divorce lawyers in Indiana. Business ownership by one or both spouses complicates the divorce process. Feelings of ownership can be very strong if one person builds the business with little to no input from the spouse. On the other hand, spouses who built and ran a business together must confront the possibility that both of them may have to give up the business entirely to settle the divorce.
Equitable Distribution in Indiana
Indiana law calls for the equitable division of all marital property, including spouses-owned businesses. Equitable is a slightly different standard than equal, and it calls for a fair division, which in most cases looks very close to a 50/50 split.
When you started or acquired your business in relation to your marriage date matters. If you had a business before marriage, you could argue to separate its value from the marital property on the day you got married with the increase in the business’s value, from the marriage date forward, only being considered as marital property. A business acquired after you got married will usually be marital property in its entirety. You’ll need to divide any business value within the marriage to settle the divorce.
Of course, you may not know what the value of the business was on the day you got married or what its value is today. An Indiana divorce lawyer can explain how to gather your financial records and find a business appraiser who can prepare a third-party report about what your business is worth.
Business Valuation Methods
Business valuation requires the input of a professional appraiser trained and experienced in the necessary calculations.
An accurate valuation depends on a full assessment of tangible and intangible property, assets, and liabilities. Therefore, an appraiser will look at:
- Business real estate and buildings
- Office equipment
- Bank accounts
- Trademarks, patents, copyrights
- Accounts receivable
- Business reputation/goodwill
- Personal reputation/goodwill
In Indiana, businesses are valued according to the fair market value model. This model reflects what price the business could demand between a willing buyer and seller who thoroughly understands all relevant aspects of the business.
Even outside of a divorce situation, arriving at a fair market value typically takes some negotiation between the parties. You need to agree on how to approach the valuation, and you may need to consult an Indiana divorce lawyer on this subject to help you and your spouse select a valuation method.
The three approaches to business valuation are:
- Asset approach: Assets minus liabilities reveal the value.
- Market approach: Value comes from an analysis of what comparable businesses recently sold for.
- Income approach: The appraiser looks at past and current revenue and projected revenue in the future.
Because the valuation figure guides property division, how the calculation is approached can be a cause for dispute. Divorce lawyers in Indiana representing the spouses may need to manage negotiations about this question. In the worst-case scenario, the question is litigated, and a court decides the valuation.
Minority and Marketability Discounts
Under certain circumstances, a business appraiser may discount an owner’s share of a valuation. The first type of discount is the minority interest discount. This reduces the valuation for a partial owner based on that person not having control over some or all aspects of running the company. Such a discount may be justified because the person, despite an ownership stake, has not had a meaningful role in operating the business.
A marketability discount may be in order for ownership of stocks in a privately held company. Despite the value that the stocks reflect as part of the business, they are not easily liquidated because they cannot be sold publicly.
Ways to Divide the Business’s Value
One way or another, the value of the business will be sorted out eventually. Upon completing that step, you can choose how to resolve the division of property.
Two married people who have operated a business jointly may choose to sell the business and divide the proceeds. An inability for the business to continue with a single owner may force people to take this route.
In other situations, one spouse may buy out the other spouse’s share of the business. You might do this by paying cash or giving away other marital assets to retain your business assets in the divorce.
However, cases arise when a spouse cannot liquidate enough assets to cover the cost of buying out the other spouse. A payment plan may resolve the problem if the business can generate sufficient revenue to make the payments.
Occasionally, two people divorce but choose to continue as business partners. This may not be the solution for everyone, but it is an option. For both people to keep their business assets and go forward together, they need to prepare a new partnership agreement.
Much of the difficulty with splitting business assets may be avoided if the couple executed a prenuptial agreement. This contract can outline who gets what and specify how to approach valuation. A prenuptial agreement can even formally separate a business from marital assets if both parties accept the terms and have received independent legal advice before signing.
Even so, a prenuptial agreement does not automatically remove the possibility of dispute. An agreement that fails to address specific situations may result in two people going through a lengthy legal dispute.
Get Answers About Indiana Divorce Laws
Even if you have a basic understanding of Indiana divorce laws, legal guidance is necessary to discover how those laws could apply to your situation. An Indiana divorce lawyer at Webster & Garino, LLC can evaluate your financial situation and recommend appraisal experts capable of valuing your business.
Additionally, we can protect your rights during negotiations and strive to resolve problems in the hope of avoiding costly court battles. Although prepared to litigate, we believe that our clients benefit the most from timely resolutions to complex problems. A fair divorce settlement will let you and your business get back on track. Contact our office by email or call to schedule a free consultation.