Hennepin County Divorce Lawyers
When divorcing spouses cannot agree on how to divide their property, Minnesota law requires the court to do so fairly and equitably. But when the major asset is the family business — often a closely held corporation running a retail, service or professional enterprise — assigning a realistic, reasonable value to such a unique enterprise can be daunting.
In addition to the practical difficulty in divorce of family-business valuation, the process can be emotionally charged. It is not unusual for such a business to have been in the family for years, even for generations, and family pride is easily wounded. Sometimes the thought of selling or liquidating the family business, or the sting of a low assignment of value can be not just professionally, but personally devastating.
In addition to the failure of a marriage, the family's livelihood that was to be passed down to the children is suddenly threatened. A family business becomes part of the family heritage. The business is often strongly tied to one family member largely responsible for its success through his or her hard work, wise decisions and business connections.
The Closely Held Corporation
A closely held corporation is one with few shares publicly available, and those are usually owned by a circle of family members. The closed nature of the family business means it is not really part of a viable market of similar concerns, so there can be a shortage of similar businesses to compare it to for valuation purposes.
The Right Expert
It can be difficult to find a financial expert with the expertise needed to fairly evaluate a closely held family business. He or she will need to understand the local market, the particular type of business, its reputation and the impact of the economy on business value. In addition to obviously relevant financial and sales data, important to the strength of the business but hard to place a price on are customer lists, good will and reputation in the community, and the spouse's particular knowledge and skill in running the business.
Professional appraisal organizations may be able to provide names of people with particular professional certifications or training relevant to family business evaluation.
Methods of Division
The Minnesota Supreme Court offers three ways to divide an asset in a divorce:
- Division and distribution
- Sale and division of proceeds
- Award of entire asset to one spouse with an arrangement to fairly pay off the other for his or her share
When the asset being divided is a family business concern, none of these methods is perfect; all have downsides.
Methods of Valuation
The valuation of a closely held corporation is not a perfect science; indeed, the Minnesota Supreme Court has said, "No matter how experienced and objective the appraiser, the valuation of a business is an art, influenced by various subtle and subjective factors." In this valuation exercise, the court has noted with approval eight factors used by the Internal Revenue Service:
- Nature and history of the business
- The economy and the health of the particular industry
- Financial data
- Earning capacity
- Ability to pay dividends
- Goodwill and other intangible assets
- Volume and value of stock sales
- Market price of stocks of similar businesses
The court requires "the application of common sense, sound and informed judgment, and reasonableness" in the process of considering these important factors in the valuation process.
Legal Counsel With Business Savvy
Hiring an experienced family lawyer with a business background can be crucial for someone entering divorce negotiations when a family business is front and center to the dispute. The parties may be able to negotiate a way to keep the family business going and still provide fairly for both spouses. Your family law attorney can also help you to find a skilled appraiser for the business.
If you have questions about family law or divorce law, contact us by calling 612-424-9477 or toll-free at 888-862-4174. Our office is centrally located in downtown Minneapolis, with valet parking provided in our underground parking facility.