You spent years building your business. Now you're getting divorced, and suddenly your spouse may be claiming an interest in it.
One of the first questions you're probably asking is: "What happens to my business in a New Jersey divorce?"
The answer depends on when the business was acquired, what happened during the marriage, what the business is worth, and the rest of your financial circumstances.
Is a Business Marital Property in NJ?
A business or ownership interest acquired during a marriage may be subject to equitable distribution in New Jersey.
It doesn't necessarily matter that only one spouse's name appears on the ownership documents. But that also doesn't mean your spouse automatically gets half of your business.
New Jersey follows equitable distribution, which means marital property is divided fairly based on the circumstances of the case, not automatically 50/50.
What If I Started the Business Before I Got Married?
This is where things can get more complicated.
If you owned the business before your marriage, don't automatically assume that your spouse is entitled to half of its current value. The timing of the acquisition, the value of the business when you married, what happened to the business during the marriage, and other facts may all become important.
If you're claiming that some or all of the business should be treated as separate property, old financial records can become extremely valuable. The longer you've owned the business, the more important those records may be.
How Is a Business Valued in a NJ Divorce?
Your business isn't necessarily worth whatever you think someone might pay for it, and annual revenue isn't the same thing as business value.
A business valuation may involve examining:
- Assets and liabilities
- Historical earnings
- Cash flow
- Owner compensation
- Accounts receivable
- Debts
- Ownership interests
- Goodwill
- Other financial information specific to the business
Depending on the size and complexity of the business, a qualified business valuation or forensic accounting professional may be needed.
What If My Spouse Never Worked in the Business?
This is a common question: "My spouse never worked here. Why should he or she have any interest in my business?"
Whether your spouse worked in the business is certainly a relevant fact, but it doesn't necessarily determine whether the business or some portion of its value is subject to equitable distribution.
New Jersey considers the larger financial circumstances of the marriage. That's why ownership and equitable distribution are two different issues.
Do We Have to Sell the Business?
Usually, selling the business isn't the only option. In many cases, one spouse wants to continue owning and operating it.
If a marital interest in the business needs to be accounted for, the spouses may negotiate a settlement in which the business owner keeps the company while the other spouse receives other assets or compensation.
Depending on the circumstances, that could involve a lump-sum buyout, payments over time, or an adjustment involving other marital property. The right solution depends on the business and the rest of the marital estate.
Be Careful About the Valuation
If someone tells you your business is worth $2 million, don't focus only on whether you like the number.
Ask: "How did they get there?"
What financial information did they use? What assumptions were made? How were debts treated? How was your compensation handled? Was goodwill included? Are the projections reasonable?
A valuation can have a major impact on your divorce settlement. You need to understand the methodology behind it before agreeing to anything.
Your Business May Be Only One Part of the Settlement
A business doesn't exist in a financial vacuum. Your divorce may also involve your home, retirement accounts, investments, debts, alimony, and other assets and obligations.
That means the question isn't always simply: "How do we split the business?"
Sometimes the better question is: "How does the value of the business fit into the entire settlement?"
That's an important distinction.
Before You Agree to Anything
If you own a business and you're getting divorced in New Jersey, don't assume you have to sell it. Don't assume your spouse gets half. And don't assume the business is protected simply because it's in your name.
First understand what portion may be marital property, what the business is actually worth, and how that value fits into the rest of your divorce.
I created my free Divorce Smarter Course to help you understand property division, business interests, alimony, negotiation, and the other major issues you'll encounter in a New Jersey divorce.
Until next time,
Steve