A small business may be a person’s largest asset included in their marital estate at the time of a divorce. This business may also be the family’s primary source of income and necessary to continue after the divorce so that the family can continue to enjoy the quality of life that they did during the marriage. The value of the business and the income that it generates for a family will have significant impact on the issues of a final property settlement, child support, and alimony. Both parties in a divorce proceeding should want to ensure the business can continue to operate and be profitable once the divorce is finalized.
For these reasons, it is important that the value of a business is safeguarded before, during, and after a divorce. Below are some considerations to help protect this asset to continue to provide for a client and their family once the marriage has ended.
First, plan accordingly. RSA 458: 16-a states that the property subject to division in divorce includes, “all tangible and intangible and intangible property and assets, real or personal, belonging to either parties, whether title to the property is held in the name of either or both parties.” If your client is owns a business before getting married, this does not exclude the business from being included in the marital estate. See, In re Sarvela, 154 N.H. 426 (2006). A prenuptial agreement, however, can set out the parties’ future rights and responsibilities to the business in the event of the breakdown of the marriage. It may also establish the value of the business at the time of the marriage, and set the terms of a property settlement or support payments if the marriage is ended. This may protect the value of the business and should bring some certainty to the divorce process.
If no prenuptial agreement is in place at the time if the marriage, New Hampshire also recognizes post-nuptial agreements as enforceable. A post-nuptial agreement will allow the parties to negotiate a fair resolution to the distribution of martial assets should the marriage ultimately end.
The corporate documents should also be considered in apportioning the interests and operating procedures of the business. Typically the Court will not want both parties still involved in the business after a divorce, absent extenuation circumstances. If the business is held jointly by the parties, the corporate documents should also spell out how ownership of the business should be transferred in the event one owner or shareholder is unwilling or unable to continue to their involvement with the venture. If this is not clear and there is no agreement between the parties on how the business should continue to be run, your client runs the risk of the business being awarded to their spouse.
Second, your client must understand the value of their business. The Court will look at the fair market value of the business to establish each parties’ interest is in this asset at the time of the Final Decree. “Fair Market Value” has been defined as, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” In the Matter of Watterworth and Watterworth, 149 N.H. 442, 447 (2003). The New Hampshire Supreme Court has also found that, “the valuation of a business is a question of fact to be determined by the trial court based upon the facts and circumstances particular to the business.” In the Matter of Cottrell & El-Sherif, 163 N.H. 747, 749 (2012)
Once the FMV is established by the Court after months of litigation and a battle of the experts or agreed upon through a joint valuation, the challenge becomes how the non-owning party will be compensated for their interest. This could be through an offset of other martial assets owned by the parties or regular payments through the business to the other spouse. In a worst-case scenario, the Court could order that the business be sold and that the proceeds be divided between the parties.
The key to dividing the value of a business is to be creative but also to protect each party’s interests into the future. Periodic payments through the profits of the business for a period of time may be agreeable to one spouse rather than payment in a lump sum. In other cases, it may be more important for your client to obtain their money right away if there is concern about the businesses future profitability. Ultimately this becomes an analysis specific to the circumstances of the parties and the business.