In both Maryland and the District of Columbia, when a couple divorces, their assets must be “equitably” divided. This legal principle applies to any small businesses owned by one spouse or the other and to any ownership interest in a small business. For this article, we will assume the small business is a marital asset.
Let’s look at two examples. First, let’s assume that one spouse wholly owns a business called ABC Company. The divorce court has a couple of options. The court could essentially divide the business between the spouses for an equitable split. This is generally by requiring transfer of stock shares or ownership units from one spouse to the other. This sort of division avoids having to argue over the value of the business.
However, more likely – and more commonly – the court can have the business appraised and assigned a value – let’s say, $500,000. Essentially, the non-owning spouse is entitled to about $250,000 in value which can be “taken” from other assets that are owned by the couple at the time of their divorce.
As another example, let’s assume one spouse is a 25% owner of a business. Let’s say that business has an appraised value of $2 million making the spouse’s ownership interest worth $500,000. Again, the court has a couple of options – it could split the shares/ownership between the divorcing spouses or could ensure the non-owning spouse receives about $250,000 in value from other marital assets.
Dividing small businesses in a divorce can be legally tricky and very contentious for many reasons. First, many small businesses will have some sort of ownership agreement that may impact what happens when an owner gets a divorce. The ownership agreement may, for example, require approval from the other owners to allow shares/ownership interests to be transferred to a divorcing spouse. This is often intended to protect a small business from being forced to accept a new owner who has just divorced a current owner. Divorces can create serious and long-term strife between the persons involved. No small business wants that sort of potential distraction in the boardroom or the workplace.
Further, most small businesses are run by their owners. The non-owning spouse may have little or no relevant skill or expertise with the type of business at issue and, if allowed to become an owner because of a divorce, that spouse may be sort of “dead weight” for the business.
Thus, if you are considering a divorce or are already in the middle of one and a small business is part of the equation, it is crucial to have experienced Maryland/DC divorce lawyers review any ownership agreement. This can help the couple evaluate options and proceed in the least complicated manner.
Another reason that dividing small businesses in a divorce can be legally tricky is because valuation is often hotly disputed. Like most assets, valuation is accomplished by obtaining appraisals from persons with expertise in valuing businesses. Valuation methods include asset value, comparable and income methods. But, valuation of small businesses can be difficult since a great deal of value is tied to the owners and their particular skill sets. If one or two owners leave the business, the value of the business drops significantly. Further, there may be issues of control and the fact that there might be little liquidity to the shares/ownership interests. For example, having 75% ownership of a business is generally more valuable than having 25% ownership since the former entails the ability to control the business Valuation methods generally provide valuation “discounts” or “enhancements” for these sorts of issues. But, again, these can become sharply argued and debated. If there is a small business in the equation for your divorce, seek the advice and counsel of experienced divorce and family law attorneys.
Maryland and D.C. Divorce and Family Law Attorneys
For more information, contact the seasoned and experienced Maryland and D.C. divorce, family law and estate planning attorneys at The Law Offices of Thomas Stahl. We have the experience and expertise you need. Schedule a consultation today or call us at (410) 696-4326 or (202) 964-7280.