Business Valuation – Why This Matters During the Divorce Process
In Louisiana, married partners will typically own property that belongs to each person separately and property that belongs to the community of both of them. Married couples who own a business may have both separate and community interests in the business, making it an asset subject to division in divorce proceedings.
Knowing the value of a business and the ownership interest of each partner is necessary so that an equal division of the community interest can be achieved. Once the value of the business is determined, divorcing couples are able to use the value of their interests to negotiate a property division.
Community interests in a business can be difficult to value, and opinions differ as to the proper valuation methods. The valuation method used will impact the value of the community interest and can affect the equity of the property division.
Community Property in Louisiana
Louisiana is a community property state which means that there is a presumption that all property acquired after marriage that is not a gift to either spouse belongs to the community equally. This presumption also applies to married couples that move to Louisiana from non-community property states.
Separate property is property that is owned before the marriage and property received by either partner as a gift or inheritance at any time. But in Louisiana, separate property does not include the income earned from separate property which belongs to the community in equal shares. Married persons who wish to keep the ‘fruits’ of their separate property as separate may execute a formal declaration of their intention and file it with the court.
Matrimonial Agreements to Characterize Property
Married persons are allowed to characterize their property differently than the law presumes by executing a written agreement called a matrimonial agreement either before or during a marriage. A matrimonial agreement executed before marriage is a pre-nuptial agreement. A matrimonial agreement executed after marriage is a post-nuptial agreement.
Matrimonial agreements entered into after marriage are required to have court approval to be recognized as valid. The judge will want to make sure the property agreement is in the best interests of both partners and that both understand how their rights are affected.
Ways a Business Can Become Community Property
Absent a matrimonial agreement that changes the character of marital property, a business owned during the period of marriage may be characterized as community property in any of the following situations:
- The business was started after the marriage – even if separate property was used to fund the business because the contribution will be considered a gift to the community.
- The business was owned before marriage, and after marriage, all income generated by the business is invested back into the business.
- The business was owned before marriage, and after marriage, the non-owner spouse works in the business or otherwise contributes to its increase in value.
- The business was owned before marriage, and the owning spouse does not execute a declaration reserving the fruits of the business as separate property.
Options for Dividing Community Interests in a Business
When there is a community interest in a business, the following options can be used to split the interest in divorce:
- Sell the business and distribute the proceeds to both spouses
- One spouse buys out the other’s interest in the business
- Split the business so that each spouse continues to operate a particular portion
- Continue to operate the business as co-owners
How a Business is Valued in Divorce Proceedings
Louisiana law requires that community assets be valued at their fair market value prior to being partitioned in divorce. Therefore the fair market value of the community interest in a business must be determined before it can be divided.
Over the years, courts in Louisiana have tried to arrive at the fair market value of a community-owned business by relying on expert testimony and a variety of accepted accounting valuation methods. The valuation included tangible business assets as well as intangible business assets such as goodwill.
A law change in the mid-2000s affected the way courts could value businesses for the purpose of partitioning them in divorce. While the goodwill of the business itself may be included in the valuation, the law prohibits including the value of any goodwill attributed to the personal qualities of the spouse being awarded the business.
The fallout from the change in the law has led courts to be more likely to accept a valuation that has been pre-determined in a business agreement – which may not be representative of the actual fair market value of the business interest at the time of a divorce.
In recent years Louisiana courts have been more likely to find the buy-sell amount in a business agreement as the fair market value of the community interest in a business when the goodwill generated by the attributes of one partner is not factored into the valuation process. The approach has been criticized as undervaluing a community’s interest in a business and not an accurate measure of fair market value for the purposes of partitioning property.
Why Business Valuation is an Important Factor in Divorce
The higher the value attributed to a business, the greater the community interest when partitioning the property and the more the spouse awarded the business will have to compensate the other spouse when the property is divided. The spouse awarded the business will argue for a lower valuation and the spouse receiving proceeds for the community interest will argue for a higher valuation.
The statute says that property belonging to a community is to be valued at its fair market value before it can be partitioned. The question of how fair market value is to be determined and the method of valuation are therefore crucial issues that can have a significant impact on how property gets divided in a divorce.
If the division of a community business interest is an issue in divorce, each spouse needs to work with a divorce attorney that has the knowledge and experience to convince the court that a business’s fair market value is the higher or lower amount that most favors the interests of their client.