By Thomas D. Colin, SCK partner and Former Family Court Judge
What happens to a spouse’s business in a divorce? Does the spouse of the business owner get a piece of it? Will the court force a sale of the business? Can a spouse hide income or assets in the business? There are dozens of questions when a divorce case involves a business owner. I’m going to give you the answer to these questions that many people expect from a lawyer - “It depends.” Here’s why:
Connecticut is what’s called an “equitable distribution state” in matters concerning divorce. That means the parties' assets are divided fairly and equitably based on various factors. However, fairly and equitably does not always mean equally. That division of assets could hinge on factors such as the length of the marriage, the causes of the marriage breakdown, and each party’s contributions to the acquisition, preservation, and appreciation of the assets, among others. The assets that are often divided include real estate, financial accounts, and personal property. But what about business interests, which are often not as liquid or readily convertible to cash? How are those divided?
A spouse’s ownership interest in a family business, private equity firm, hedge fund, or other type of closely-held entity is generally considered an asset subject to the laws of equitable distribution. This involves a three-step process of identifying, valuing, and dividing the business interest. It’s best to bring in an experienced and skilled family lawyer, often assisted by a business valuation expert or accountant.
The three-step process includes:
- A close and careful examination of the documents that created the business. Is the business a C-Corporation, S-Corporation, Limited Liability Company (LLC), General Partnership (GP), Limited Partnership (LP), or some other entity? Does the spouse own a majority interest in the entity or have a small minority stake? Does the spouse have voting rights, decision-making authority, or other control over the entity? Your attorney and valuation professional will craft and create a detailed inventory of the documents required to be reviewed to properly identify the interest to be evaluated here.
- An assessment of the value of each spouse’s interest. There are several standards of value that can be used here. The standard used in divorce cases is often called fair market value (FMV). This is the price a willing buyer would pay for the interest from a willing seller when neither the buyer nor seller is under any compulsion to buy or sell. Several methods can be used to determine FMV, such as looking at transactions of comparable business interests or capitalizing future business income and revenues. In arriving at FMV, the valuation professional may apply important principles such as discounts for marketability, lack of control, tax issues, or other reasons. It may also be necessary for the business valuation professional to determine whether the salary and other income paid to the business owner is reasonable and whether the business pays for the personal non-business expenses of the family. In some cases, each party retains their own valuation expert. In other cases, the parties retain a joint valuation expert. There are pros and cons to each approach that should be discussed with your attorney.
- A division of each spouse’s interest fairly and equitably. There are a few ways to do this. Here’s one example: Let’s assume the parties have agreed to an equal division of their assets: a house worth $500,000 and the husband’s ownership of the family business with a fair market value of $500,000. If the parties use what’s called the “offset method,” the wife might receive the home, and the husband might receive the business. If they use the “in-kind method,” each asset would be sold, and the proceeds of the sale of both assets would be equally divided between them. If they chose the “deferred sale” method, the assets would be divided at a future date after they are sold or liquidated. There are also other methods of division that may be considered depending on the facts and circumstances of each case.
It is important to discuss what may be best for your situation with your attorney and that the parties’ agreement be appropriately documented and submitted to the court for judicial approval. In many cases, a spouse’s business interest is the most valuable asset in the marital estate; working with a skilled and experienced family lawyer and valuation expert is a crucial step to ensure a fair and equitable resolution.
Thomas D. Colin is a partner at Siegel, Colin & Kaufman who was recently named 2024 "Lawyer of the Year" in Family Law in Stamford by Best Lawyers®. He is a former Connecticut Superior Court Judge who served as the Presiding Family Court Judge in Stamford, Connecticut. Contact him for help with divorce, including business valuation, alimony, legal separation, custody and visitation, child support and division of marital assets. Contact Tom in the Stamford office at (203) 326-3332 or by email to schedule a consultation.