Divorce and Evaluation of Your Business

In New York , the law, known as equitable distribution, provides that all property acquired during the course of the marriage whether a business, a stock portfolio, real estate, or any other personal asset including artwork, pensions, 401ks and the like must be valued and distributed upon divorce.  Frequently, when parties first marry, one or the other may bring into the marriage an interest in a business or other asset that was acquired prior to the date of marriage.  These assets are considered separate property and cannot be divided by the court.  However, there is an important exception to this rule and that is the appreciation of a separate asset that occurs during marriage will be considered a marital asset and valued and divided by the court upon the entry of a divorce judgment.  When there is appreciation of a separate asset, then it becomes the job of your attorney to attempt to exclude this appreciation by proving to the court that the appreciation occurred passively, that is through no active participation by the client.  Passive appreciations such as a stock portfolio that has risen because of market forces and not because of the management of the account (i.e., the portfolio remained intact and there were neither purchases nor sales during the period that the property appreciated in value), will be excluded from the marital pot.  Conversely, the increase or appreciation of a family or closely-held business that occurs during marriage because of the active participation of the business man or woman, will be considered a marital asset subject to valuation and distribution upon divorce.

Valuating the Business

Once it has been determined what assets are marital and what assets are separate, the next important issue to deal with is the value of such business or other property.  In this regard, the selection by your attorney of a competent forensic accountant who has testified before the courts, and of perhaps even greater importance, enjoys a high degree of respect for his expertise, may make the difference between a favorable or unfavorable evaluation.  There are a number of ways that businesses may be valued.  Many clients fail to realize that even though their services to the business may be unique and it is their feeling that, if they were not running the business, it would have no value whatsoever, is a fallacy and must be resisted, since the court will not listen to such an argument and it will fall upon deaf ears.  Even small businesses run by one individual, will be treated much as a larger business and evaluation will be made based usually upon a capitalization of earnings.  After determining what the reasonable value of the spouse's services to the business might be and fixing an appropriate salary, the forensic examiner will then determine the excess earnings based upon a review of the income statements of the business , profits and loss statements, and  then ascribe a proper multiple of earnings.  This multiple will be based upon companies in similar industries whether it be private or public.  Then, the evaluator will arrive at a capitalization of earnings.  For example, if excess earnings of the company are found to be $50,000 per annum and the capitalization rate in the particular industry in which the business is being conducted is 10 then the value of the marital asset would be $500,000.  This, of course, is an oversimplification but it is illustrative of the ways by which small businesses are valued.

Lack of Marital Contributions and Unequal Distribution

Once the value is fixed and testimony of your professional evaluator is accepted by the court, you still have a chance to prove to the court that your husband or wife, as the case may be, did not contribute in any way to the growth of the business or its operations and that there was a lack of marital contributions (i.e., neglect of the home or children, etc.).  You might be successful in convincing the court to make an unequal distribution perhaps giving to your spouse but 10 or 15% of the value determined by the forensic accountant.

Each case will involve its own intricacies and difficulties.  Evaluation of business assets and the appreciation of separate assets is a very difficult task and requires acute skills and professional excellence in order to try the case in court and obtain a successful result.  It is for these reasons that the selection of a qualified matrimonial attorney and forensic accountant working together as a team is of paramount importance.

* Mr. Samuelson is a partner in the Garden City firm of Samuelson, Hause & Samuelson, LLP, a matrimonial law firm dedicated to professional excellence.  He is a past president of the New York Chapter of the American Academy of Matrimonial Lawyers and is a noted author having written five books and over 100 professional articles in the field of divorce law.

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