In Florida, there is a presumption under the statutes that any asset acquired during a marriage (and similarly any liability incurred during that marriage) is presumptively divisible, 50% to each spouse, as marital property. It comes to great shock to many small business owners that this can include the source of their livelihood – regardless of whether their soon to be ex spouse worked in the company and/or has titled interest in it or not.
As with all things, there are always exception, and Florida Statute 61.075(1)(f) states that though “the court must begin with the premise that the distribution should be equal, unless there is a justification for unequal distribution based on all relevant factors, including . . . the desirability of retaining any asset, including an interest in a business, corporation, or professional practice, intact and free from any claim of interference by the other party.” This means that a business owner can come in and argue for entitlement to unequal distribution of the otherwise “martial” asset (i.e. ask for it to be awarded exclusively to him or her with no “offset” to the other party). It should be noted, however, that unequal distribution awards of marital assets are rarely employed in practice, since the threshold for rebutting the presumption is high.
Instead, most business owners can generally expect to have to give up something in return for the award of to them of their business (and again, there are exceptions that might apply, such as pre-nuptial agreement arrangements or other issues with stock ownership and third party ownership of business interests). The shorthand public policy rationale behind this presumption is that but for the spouse and his or her efforts in supporting the other party in getting the business off the ground – be it in active contributions such as sacrifice of income or in more passive efforts such as keeping the home front going in that party’s absence – the business, itself, would not have been as successful. In short, the marriage is treated as a partnership in all respects, including when it comes time to assessing how each partner may or may not have enabled the other to engage in the business of being their own boss.
It is important to note that a different set of criteria will apply if the business was owned BEFORE the marriage – in that case it is typically treated as a non-marital asset and unless the non-owning/non-interested spouse can show substantive financial and practical investment in the growth and appreciation of the asset during the marriage, the presumption of entitlement to an interest in it will not apply.
The critical piece of division of a business will come in terms of its valuation. The bigger the business, the better it is for one to make the investment in a business evaluator or forensic accountant to help you with your case. These professionals will assess the true “equity value” of the business, such as accounts receivable (money expected to come in from clients/patients, etc.), assets such as equipment, tools, vehicles, and real property, and debts such as payroll obligations, loans, property debts, and bills. In addition, these professionals will assess the “enterprise goodwill” of the business owner – i.e. what of his or her own personal efforts is what makes the business worth something, vs. what the business standing by itself would be worth if liquidated and sold without that person. As an example, a fishing boat captain can sell his boat for X amount of dollars as a piece of liquidateable equipment, but that will not approach what the business is truly worth due to his intangible (and unliquidatable) contribution as a captain who knows where the fish are. In that unique instance, it is the personal skill that merits the value in the business, not the boat itself.
What this all means in practical terms is that if a business is valued at being worth $50,000 equity in account receivables and assets such as office equipment, tools, vehicles, and real estate, and that asset is awarded to the spouse who typically is employed by it, then that spouse could expect to “give up” $25,000 of his or her interest in some other marital asset – such as a car, or a piece of personal property – in order to “equalize” the award of the business (alternatively the Court might opt, instead, to assign more marital debt responsibility to make up the difference). And typically this is what will happen, as the Court has no interest in separating a business owner from his or her livelihood and rarely will order full out liquidation.
This topic, it should be noted, is far more complex and personalized to each business owner than this writing could ever hope to cover, but in the most general and broadest brush strokes it could be concluded that any business owner who gained his or her business interest during the marriage can expect to have to deal with questions regarding the other party’s potential interest. Contact Theodore Rechel for more information on Divorce and Business.