The division of marital property during a divorce is often complicated and contentious. Both spouses may become attached to a particular car or an item of furniture. Property division can quickly become acrimonious. The allocation of business interests is no exception. Business valuation during a Maryland divorce can be a complex matter.
Maryland state law requires that all marital property is allocated between the spouses during divorce. Marital property means anything acquired over the course of the marriage. The property is split equitably which does not always correspond to a 50/50 division.
Our experienced Maryland family lawyers can advise you on all aspects of divorce including distribution of marital property as well as what constitutes marital property.
Are Business Interests Considered Marital Property in Maryland?
If a husband or wife ran a business independently of each other, they may believe this is not a marital interest. In fact, any business acquired during the marriage is usually considered to be marital property under Maryland law, meaning the business forms part of the equation when the parties break up.
During the divorce, the business must be given a valuation which factors into the divorce settlement.
How Are Businesses Valued in Maryland?
One of the most important factors in business valuation during a Maryland divorce is to know how much cash flow the business generates.
It’s standard practice to request the most recent five years of company financial statements and tax returns to gauge how much money is flowing into a business. This provides a detailed understanding of the company’s profitability and its normal operating levels. It will also indicate how much cash the business could potentially generate.
During a divorce, the spouse who owns a business may incur unnecessary expenditures. This can have a misleading effect on the business meaning it appears to have little value. Alternatively, the spouse who owns the business may try to use as much money as possible from the business before the non-owner spouse can benefit.
The courts will look for evidence of money being taken from a business prior to a divorce like excessive compensation, payments to an owner, or unnecessary expenditures. This money could potentially be added back to the cash flow of the company to determine the overall value of the enterprise.
What Documents Are Necessary in the Valuation of a Maryland Business Before a Divorce?
When valuing a business, an attorney or analyst will want to see a considerable number of documents including:
- The articles of incorporation;
- Certifications and qualifications;
- Lists of shareholders, partners or members and ownership percentages;
- Detailed general ledgers and /or cash disbursement journals;
- Records of staffing costs.
What Happens When Business Documents Are Not Provided During Divorce?
On occasions, requested documents or other pertinent information are not forthcoming. This may be the result of the business-owning spouse knowing more about the business than the other spouse and withholding information to impact the valuation in his or her favor.
It may be necessary for your Maryland divorce attorney to subpoena the records.
When information is not forthcoming, a financial picture of the value of the business may be drawn out via answers from depositions, interrogatories and other testimony.
Other metrics and relevant industry standards, and past and current contracts to evaluate the profitability of the business, may have to be examined.
You should talk to an attorney if you are concerned your ex-spouse is seeking to harm the business to slash its value during divorce proceedings. It’s important to obtain as much information as possible over a longer period, including a five-year history of financial information. If a business has performed consistently for five years but its fortunes plummet suddenly during a divorce, your former partner might be trying to sabotage it.
Assessing Goodwill In a Business Valuation During a Maryland Divorce
Goodwill is an intangible asset. It represents the value of a business’ brand name, its reliable customer base, good relations with customers and employees and any patents or proprietary interests. It is broken down into “entity” and “personal” goodwill during the divorce process.
Entity goodwill is attributable to the company itself and can be transferred with a company when it’s sold.
Both entity and personal goodwill play a role in the valuation of a business during the dissolution of a marriage in Maryland but the courts have ruled that personal goodwill is not a marital asset. It is “uniquely personal” in nature. Personal goodwill is taken out of the value of the business before it can be considered a marital asset.
Division of Business Assets During a Maryland Divorce
The issue of how to allocate business interests after a divorce is a complicated one. The courts do not simply divide businesses in the same way as property like furniture or cars. A business is not real or personal property.
The ‘division’ of a marital business during a divorce proceeding in Maryland is complicated by factors like stock ownership, the value of the business, and considerations of employees at the business.
Case law limits the powers of a court to divide a business. In the case of Turner v. Turner, the Court of Special Appeals found the sale or partition of the marital business was not possible. The appellate court found it was impossible to award the wife half of the business, because the husband owned 87 percent of the shares of stock and the wife owned the remaining shares.
The court lacks the authority to re-title stock or to order its sale. Therefore, in Turner, the court awarded the wife a larger percentage of the total value of marital property in the form of a monetary award.
This means when a marital business is an issue in a divorce case and it is held by both spouses but individually titled it may be necessary to dissolve a corporation when the parties are unwilling to work together or continue to run the business. Usually, in the case of a business, the court will give a value that’s taken into consideration in the overall property settlement rather than seeking to split the company between the spouses.
Paying Off Your Spouse During Divorce to Retain a Business
In some cases, spouses who failed to protect their business interests sufficiently before marrying or during the marriage will be able to ‘pay off’ their spouse.
A mutually beneficial resolution can allow you to keep your business interests intact and provide substantial value for an ex-spouse. An example would be letting a former spouse retain the house or car in exchange for relinquishing an interest in the business. If this kind of deal is not an option, a qualified family lawyer can advise you.
Hire an Experienced Family Attorney for a Business Valuation During a Maryland Divorce
At the Law Offices of Randolph Rice, we can represent you in all aspects of divorce in Maryland, including the division of property and the valuation of a business. These are complex financial issues that require an experienced team. Call us at (410) 694-7291.