A closely held business is owned by an individual or small group of shareholders, who are often members of the same family. Shares of a closely held corporation are generally not traded in the securities market(s).
Closely held businesses in divorce pose unique challenges for couples. That is because there are many different arrangements for those businesses. In some cases, spouses may work side-by-side in the business. One or both partners may hold ownership interest in the business. One spouse may focus on the entrepreneurial venture while the other maintains the home. In addition, other family members may be involved in the business as partners or shareholders, adding an additional layer of complexity.
Business Valuation
In Illinois, marital property is divided using “equitable distribution.” This means all assets obtained during the marriage must be split fairly, although not necessarily in half, or 50/50. For closely held businesses in divorce, it can be difficult to determine the fair market value, which is the approximate amount of what the business would be worth if it were sold.
During the business valuation process, each party’s attorney may work with financial experts to accurately determine what a company is worth. These experts can include financial analysts, forensic accountants, and appraisers. Attorneys typically engage business valuation experts when there is a dispute over the value of a business interest. Although this may seem simple, it can produce a wide range of results depending on the standard of value that is utilized. Therefore, it is important that you understand the different approaches to business valuation.
- Asset-based approach – This approach focuses on the monetary value of the business’ assets.
- Income approach – Calculations are used to determine the future income stream of the business, which can then be converted to present cash dollars to determine the value of the business.
- Market-based approach – Similar to an appraisal of real estate, this approach uses comparables in the same field or industry. In other words, an appraiser focuses on the sale prices of similar businesses, companies, or practices.
- Standard of value approach – Illinois statutes decide what is considered “fair value” in determining the buyout price of a business during a divorce. According to the law, “fair value” of a person’s share in a company means “the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.”
In some marriages, a couple may have worked with each other and started a business or professional practice together. In other cases, one spouse may have owned a company prior to getting married, but his or her partner helped run it during their union. Regardless of whether the business is family-owned, or if one person acts as a silent partner, each party may be entitled to part of the value of the business assets.
Resolving issues related to closely held businesses in divorce
While closely held businesses in divorce will have their own set of problems and complications, there are a few basic methods for addressing them.
- Co-ownership – Both spouses continue to own the business after the divorce. In order for this to be successful, you and your partner have to have a solid working relationship and a high level of trust. Co-ownership may not be ideal if you have a contentious relationship.
- Sell the business and divide the profits – This may be ideal if you need to cut the financial ties with your spouse. In addition, you would have some additional money to invest in a new independent venture. The downside is that this can take some time and there will be some additional tax implications from the sale.
- Buy-out the other spouse’s interest – In a buyout, one spouse keeps the business and buys the other spouse’s interest.
Whatever your circumstances are, you should consult with an attorney who has experience with complex property division. Maria Citino has handled numerous complex financial issues such as disputes involving business interests, tracing of non-marital assets, complex financial discovery matters, and international property disputes. Closely held businesses in divorce may complicate the divorce process, but our experience will help us create the right strategy for you. Contact Citino Family Law today for a consultation at (312) 248–3849.
