According to data from the Small Business Administration (SBA), more than 97% of the state’s employers were small business owners in the year 2011. Divorce statistics for that same year reflect that nearly 4 out of every 1,000 marriages ended in divorce, according to the Center for Disease Control and Prevention (CDC). It is easy to conclude that many Minnesota family law cases must resolve the issue of what to do with the division of a business as part of a divorce proceeding.
Divorce proceedings involving businesses are usually contested, typically when it comes to the valuation of a business. There are many useful legal tools to determine the value of a business in order to equitably divide such property.
Key Person Discount
As the name suggests, this method evaluates how vital a person is to the business. Is the contribution of one spouse more significant to the company’s profitability as compared to the other? By determining if one spouse e had a greater impact on the success of the business, this knowledge is used to argue that without the “key person”, the value of the business will be less. Thus, the “key” person holds a greater share of value and interest in the business.
Businesses have shareholders with differing levels of control based on how many shares they retain. A spouse who is a minority shareholder or whom does not have a controlling interest in the business may receive a minority discount in the valuation of the business. The reason for the discount is because if a spouse’s minority interest were to be sold, the fair market value of the interest would be less. Indeed, a majority shareholder interest in a company is generally worth considerably more than a minority position in a company.
Fair Market Value
Many factors are considered to determine the valuation or fair market value of a business:
- Recent property tax assessment;
- Value of assets within the business;
- Valuation determinations of appraisers;
- Current common selling price of the asset or assets; and
- The going rate for the sale of similar businesses.
Although some of these factors are concrete, such as a tax assessor’s statement, appraisers could come up with differing numbers on their assessments. Regarding final sale price of similar assets, results could be as varied as the conditions of individual sale. It is easy to see, then, how a divorce involving the dissolution of a small business usually results in a contested divorce.
Application of Key & Minority Discount
In many cases, there is disagreement between business valuation experts on the amount to discount a valuation for the key man discount and minority discount. Additionally, one or both of the spouses may have a nonmarital claim in the business which was created by a gift, inheritance, or was a product of the spouse starting the business before the marriage. Generally, property of equal value is exchanged for the other spouse’s marital interest in a business. It is rare for the parties to both retain an ownership interest in a business following a divorce proceeding as there are always issues regarding income, expenses, management, and operational decisions which could, once again, pit spouses against one another.
It is important to have a qualified attorney representing your best interest in divorce proceedings. In cases involving division of property which includes a business or business interest, a winning legal team will include advisers experienced in the complexities of determining business valuation and equitable division. To put a winning team to work for you, please contact us.