Business Valuation Issues in a Chicago Divorce

If you are a business owner contemplating a divorce it is a good idea to familiarize yourself with business valuation issues that often arise in Chicago divorce cases. Property division issues in a divorce can become contentious and costly, especially when a business is involved.

6 Business Valuation Issues In a Divorce

There are a number of issues that arise can arise when one or both spouses in a divorce own or have an interest in a business. Here are 6 of the key issues to be aware of in your divorce.

1. Is the Business “Marital” or “Nonmarital” Property?

Businesses can be considered marital or non-marital property. The primary determination of whether or not a business is “marital” or “nonmarital” property involved answering the following questions:

  1. how the business was acquired,
  2. the time frame during which it was acquired, and
  3. how much marital money or other marital assets has or has not been utilized to benefit the business.

It is a complex issue.

2. What is the Business Worth?

Further, if a business or a portion of the business is considered marital property, it can be hard for a court to determine what value to assign to the business. Oftentimes, the Court will rely on its’ own business evaluator as an expert, appointed pursuant to 750 ILCS 5/503(l) of the Illinois Marriage and Dissolution of Marriage Act. Other times, the Court might utilize a party’s independent expert business evaluator to assist in the valuation.

3. Determining Business Income in a Divorce

Another issue business owners often have is a complex income determination. Income for purposes of taxes is not the same income that is utilized in divorce cases for setting spousal support or maintenance, or child support. Business owners often have the luxury of using their business to pay for certain expenses which could be a hybrid of personal and business expenses, and all or a portion of those funds might be includable in the business owner’s income for support purposes, depending on what it is for. (For example, if their vehicle is paid through the business, or a country club membership is paid through the business, these could have mixed use of business and personal). Businesses also might retain earnings. Perhaps the business owner usually takes a draw, but because of the divorce case, they do not, and they hold the money in the business account to try to avoid having to pay support on it. These are all things that a business evaluator can help investigate and determine. Business evaluators can often assist parties in determining what the business owner’s true income is for support purposes.

4. The Business Valuation Process

So, how is a business evaluation completed? First, the evaluator has to be retained. Different business evaluators might be a good fit for a particular case. Ideally, the parties would find someone who has experience specifically in the specific business industry. For example, valuing a pizza restaurant is not going to be the same as valuing a daycare center. The businesses have unique aspects to them. There are business evaluators who may have experience in valuing one type of business, but not another type of business and in that scenario, they’d need to find someone who knows that particular type of business so that they are already familiar with the multiple components of the business.

Next, it is important that all of the necessary discovery has been exchanged or subpoenaed. Business evaluators typically need years of bank statements, payroll documents, expense documents, receivables, payables, salary information, tax returns, and more. If one party wants the business evaluated but the other does not, you may face a less than cooperative business owner and subpoenas may need to be issued. It is also a good idea to enter a court order indicating what will be produced and by when, to help ensure that there is compliance.

5. Business Valuation Fees

Fees for a business evaluation can also be expensive. Filing a motion to appoint the business evaluator may be necessary if someone needs access to the marital estate to pay the retainer for the business evaluator. A court order can indicate how these fees will be paid, to ensure that the process runs smoothly.

6. Addressing the Goodwill a Business

The issue of “goodwill” often arises in business evaluations, too. Goodwill is an argument that the particular owner is the primary reason why people patronize the business, and that if the business were to “sell” to someone else, the customer base wouldn’t follow, so there should be a “discounted value”. This argument we often see in a medical practice. People like their doctor and want to see their doctor, so if their doctor no longer is a part of the practice, their patients may no longer patronize the practice. The argument is that the business is not worth as much, but for the owner being involved. We often see the business owner assert this argument to discount the price, so it is something to be aware of.

Overall, if one party in a divorce case is a business owner, it is probable that a business evaluation will need to be completed. The court usually needs assistance in valuing the business. This can then allow the parties to discuss a “buy out”. Often times other assets can be used to “buy out” a spouse from their share of the business (i.e. someone might keep the house and the business operator might keep the business, and the equity might work out where this math works.)

Seek Legal Advice from Our Chicago Divorce Attorneys

If you are a Chicago business owner contemplating a divorce it is important to understand how your divorce could impact your particular business, and we are happy to help with that conversation. For a free consultation with the Chicago family law attorneys at Anderson & Boback, schedule a meeting today!

THIS ARTICLE WAS PREVIOUSLY PUBLISHED AT: https://illinoislawforyou.com/blog/valuing-a-business-in-chicago-divorce/

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Anderson & Boback Family Law

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