I owned this business before I got married, so it’s just mine, right?

Here is a the top valuation issue every business owner should know before filing for divorce.

Sometimes a business owner will think that they don’t need a valuation because…

5.      I owned this business before I got married and my name is on everything, so its just mine right?

Click here to view this article in video format.

There are many times when a business owner has owned a business for several years prior to the marriage. So we talk about these issues as the difference between separate property and marital property. Separate property was owned prior to the marriage and an expert might come in and “trace” the assets to determine if they are still separate or have been co-mingled or turned into marital property. Why do you care? Well separate property is not divisible in a divorce situation, meaning you don’t have to split it with your spouse when you get divorced. This is for certain states that allow these rules. Community property states are different – such as California, Texas and Arizona (as well as several other states).

Typically there are nuances regarding income from a business, especially separate property, that are different then the appreciation in the business. So for example in the state of Missouri - income on separate property is marital but appreciation of separate property is still separate. So what does this mean? One example is that if you own a share of stock, as a separate asset owned before the marriage, then the income or dividends on that stock is still considered marital income that could be divided between the couple. But if the stock went from $2 a share at the time of marriage to $4 a share at the time of divorce, then the appreciation in that stock, because it is still one share of stock, is a separate asset and the value of $4 per share is still considered separate.

But if the marital income was reinvested to buy more stock, then you could have a portion is marital and a portion is separate. See how it gets confusing pretty quickly? So an expert will come in and analyze the investments to understand which portion is marital and which portion is separate, they also testify to the process in court. So how does this translate to the business? Well the valuation expert may have to consider what was the value at the date of marriage and what is the value as of the date of divorce. Even if there is a change in value, if the change in value is due to appreciation of that business then it could still all be separate.

But then you have to consider the income from the business, and was it reinvested in the business or was it paid out in the form of compensation to the owner or distributions of income. And then finally the valuation expert may have to consider if that compensation or the distributions were reasonable. There could even be a layer of complexity depending upon the structure of the company. So is this company an LLC, a partnership, or a Corporation? Sometimes the issues regarding a business that was created prior to the marriage are not as clear cut as it would seem, so the valuation expert would have to consider the situation from many different aspects.

So, I am considering filing for divorce, but want to be prepared - What should I do next?

Give us a call! No really, you should reach out to someone who specializes in valuations for the purpose of divorce. There may be many valuation companies near you, but do they understand the divorce court system in your state? That would be a good first question to ask. Then see how many times they have testified. Are they trained as a mediator? Do they understand how to negotiate settlements with other experts?

My name is Melissa Gragg and I am a divorce valuation expert witness in St. Louis, Missouri. I work with business owners and entrepreneurs in every stage of the divorce process, whether in mediation, collaborative divorce or litigation. There are many questions and myths about what happens in a divorce when you own a business. If you have any additional questions or would like to talk about your specific situation, please give us a call or text us at (314) 541-8163 or check out our website at https://www.ValuationStLouis.com/

Click here for our next video in our series for business owners + divorce.