If you are going through a divorce in Utah, and you, your spouse, or both of you fully owned or even partially owned a professional practice, corporation, limited liability company or other business during your marriage, you might want to conduct a business valuation as part of the divorce process. The idea is to get a reasonably-accurate estimate of the value of the business. The way Utah courts look at it is: since marital property is divided equitably between spouses during a divorce, usually 50/50 (see our blog post on property and debt division in Utah), then any business or portion of a business that is considered “marital property” also needs to be divided.
Now, spouses may not want to actually sell the business. Maybe they both want to keep it so that there is income to pay alimony, child support and provide income to live on. Even so, it’s important to determine a value that can be figured in to the overall division of the marital estate between the spouses.
One way to divide the marital portion of a business is for one spouse to receive full ownership of the business while the other spouse receives a one-time lump sum (or some other monthly, quarterly or other periodic payment) payout representing his or her share of the business. This is similar to the way homes are often dealt with in divorce: if one spouse keeps the house, the other spouse receives 50% of the value of the marital portion of the home. Spouses can be creative, but the final overall division of all martial property – including a business - and marital debts should be fair and equitable. For example:
In either of these examples, what matters is that the divorcing spouses each receive property and assume debts that, taken all together and viewed from a mountain top, looks equal and fair. The default equitable division is fifty-fifty of the value of all marital property. But remember, marital debts need to be divided as well between spouses. It could be that marital property is divided 40/60 between spouses but the spouse who receives 60 percent of the marital property assumes considerably more marital debt that the other spouse. You see how overall that can be fair? In any event, when a business (or portion of a business) is considered marital property, it’s helpful to know its value in order to create an equitable distribution.
You may be wondering:
- How do I know if my or my spouse’s business is martial property?
- And how do we properly conduct a business valuation under Utah law?
The answer to the first question is: Talk to a lawyer. It will depend on when you were married and when the business began. And, hey, you may be surprised. You may have little to no involvement in a business operated by your spouse, you may not be an owner, manager, shareholder or member and the business is still considered marital property. If either both of you or just one of you own the business or corporate stock, it will be considered marital property as long as it was established during the marriage and both you and your spouse engaged in “joint efforts” towards the marriage. “Joint efforts” could include domestic duties, such as caring for children, running the household, sacrificing time with the other spouse so the other spouse could work, etc. (See Savage v. Savage, 658 P.2d 1201, 1204 (Utah 1983), Lee v. Lee, 744 P.2d 1378, 1380 (Utah Ct. App. 1987), and Dunn v. Dunn, 802 P.2d 1314, 1318 (Utah Ct. App. 1990)). If there were joint efforts in the marriage, and the business was established during the marriage, the business’s value should be equitably divided even if was only owned and operated by one spouse.
However, if the business was established before the day you were married, it might be considered separate property. That being said, any growth or appreciation of the business’s value which occurred during the marriage might be considered marital property. So, if you own a business which commenced prior to the marriage, and it remained dormant in value during the marriage, you probably will not need to conduct a business valuation. But if the business increased in value during the marriage, and both spouses contributed “joint efforts” to the marriage, especially if the other spouse’s contributions included a growth or appreciation of other marital property, a Utah court might award the other spouse a share in the appreciation of the business’s value. (See Elman v. Elman, 45 P.3d 176 (Utah Ct. App. 2002)). If that describes your situation, you will likely need to get your business valuated.
The answer to the second question will be addressed in a future blog.