Is My Spouse Entitled to Half of My Business?

 Posted on May 02, 2023 in Divorce

When parties begin to negotiate the division of their marital assets and debts, the issue of how a business interest will be treated or divided arises. Owning a business can be stressful, and often times requires years of sacrifice, so making sure that your business interest is protected, is extremely important to many business owners.  Conversely, those spouses who have supported their spouse in the growth of their business, or even have directly contributed to its value (working for the business, using marital funds to purchase items for the business, etc.), feel a sense of ownership or entitlement to the business despite whose name is on the ownership paperwork.  This begs the question, how is a business interest viewed in a divorce and am I/is my spouse entitled to a monetary value for it? 

The first question that needs to be resolved in any divorce case involving a business is: When was the business started? In order for the business to be considered a marital asset subject to division, the business must have been formed during the marriage. If you are a business owner and you know you started the business before the marriage, it’s important that you retrieve any documents that prove you started the business interest prior to the marriage, as the burden of showing that the business is non-marital falls upon the business owner. Documents such as the letters of incorporation, tax returns, or a contract showing the purchase of the business, are examples of documents that can be used to establish that your business is non-marital. Having the court declare that your business is non-marital, means that your spouse won’t be entitled to a portion of the value of the business. However, the value of the non-marital business may still be relevant as if the court finds the value is substantial, then the court may consider the value of it when determining what an “equitable” division of the marital estate will be.  For example, if you have non-marital assets in the amount of $1 million, and your marital estate is $2 million, the court may award you less than 50% of the marital assets (the division could be 60-40 or otherwise disproportionate).  

If the business interest was formed during the marriage, the next question that needs to be answered is: What is the business worth? Due to the complex nature of how a business should be valued, generally, an expert that specializes in valuing businesses should be retained to determine the value of the business. These experts often have a background in forensic accounting, business valuation, and financial consulting in order to ensure that the business interest is thoroughly evaluated.  There are many methods in which a business can be valued, including market capitalization, time revenue method, earnings multiplier, discounted cash flow, book value and liquidation value.  Which method or methods of valuation are appropriate is typically determined by the business valuation expert depending on the nature of the business.  During this part of the process, the business owner will be required to provide the expert with financial statements, ledgers, and any other documents that are relevant to the business.  Business owners are also likely to be interviewed by the valuation expert via a management interview.

After the business is valued, a question that is often addressed in the valuation report and considered is: Does the value of the business come from personal or enterprise goodwill? In addition to determining the proposed or actual value of the business interest, the expert also needs to determine if the value of the business is created through personal or enterprise goodwill. Enterprise goodwill is the set of characteristics associated with the business entity itself, which is automatically transferred to the potential purchaser of the business. Examples of enterprise goodwill include the workforce, the brand of the company, the actual location of the business, any potential patents the business may own, and the current customer base of the business. Enterprise goodwill exists regardless of who owns or operates the business. In the alternative, personal goodwill is associated with the specific business owner’s reputation, their skills in that specific industry, and their knowledge and experience within the business’ related industry. These personal characteristics are important and integral to the business as they can create customers and ultimately profit for the business.  Lawyers, doctors, financial advisors and those with a specific client base are often considered heavily valued upon personal goodwill.

The determination of whether the business’ value is derived from personal or enterprise goodwill is fundamental to the business valuation because under Illinois law, personal goodwill has been determined as “non-marital” property—meaning that any value of the business that is derived from personal goodwill, cannot be divided between the parties. For example, if Bob owns a manufacturing company that is valued at $2 million dollars, and the business valuation determines that 50% of the business is derived from personal goodwill, and the remaining 50% of the value of the business is derived from enterprise goodwill, then the Bob will only pay his wife for 50% of the value of business derived from enterprise goodwill. Bob would not be required to pay his wife for the 50% of the business derived from personal goodwill. 

Navigating the division of a business during a divorce can be complex and confusing at times, so it’s always important to retain an attorney who is experienced in handling business interests in a divorce. The attorneys at McSwain Nagle Giese & Rapp, P.C. regularly serve business owners and their spouses and are skilled and familiar with strategizing how parties can protect their interests. By scheduling a free thirty (30) minute consultation with McSwain Nagle Giese & Rapp, P.C., you can start working today to form a plan to maximize the protection of your interests.