Business Ownership and Professional Practices in Divorce

Valuation and Division of the Marital Interest in Your Kentucky Business in a Divorce

There are unique legal and economic challenges associated with business ownership and professional practices in a divorce.  How is the marital interest in a closely-held business, LLC, S-Corporation, C-Corporation or professional practice established and divided during the course of a divorce in Louisville or anywhere in Kentucky?  How do you protect the ongoing operations of a professional practice or a business throughout and after a divorce while ensuring that a former spouse receives appropriate compensation for their marital interest in the company or practice?

The experienced divorce lawyers at Dodd & Dodd Attorneys, PLLC have extensive experience in divorce cases that involve business interests.  The first step in this process is to establish the valuation of the ownership interest in the practice or business entity.  The next issue would be to determine what percentage, if any, of that ownership interest can be characterized as a marital asset.

If the business or professional practice was started or acquired during the marriage, the ownership interest in that entity is almost always going to be characterized as “marital property.”  If the business or professional practice was begun or acquired prior to the marriage, it may be considered “non-marital property.”  However, a spouse may be entitled to the appreciation or growth in the value of that business or practice which occurred during the term of the marriage.  This is especially true if marital funds were invested into the company at any point during the marriage.

The State of Kentucky and our family law courts are not concerned with how business ownership is structured, or whether the spouse participated in or did any work related to the business at all.  Kentucky law considers marriages to be an economic partnership and marital assets are to be divided justly.

How Do You Establish Valuation of a Business or Professional Practice?

There are several methods used to establish the valuation of the marital interests associated with business ownership and professional practices.  When possible, experts can appraise or calculate the value of a business if it were sold by a “willing seller” to a buyer.  The court would then divide that value according to the marital interest in the business.  An “Earnings Multiplier” is another standard method for valuing the marital interest in a business asset.  The annual income, sales or gross receipts are  multiplied by a factor known as an earnings multiplier which establishes the valuation.  The process for establishing both the figure for the annual gross receipts and the multiplier itself can be quite complex.

Dodd & Dodd Attorneys, PLLC works with independent business valuation experts who will review all of the underlying documentation, financial statements and tax records as well as bank account statements looking back several years.  In some cases each side insists on hiring their own expert to establish valuation.  These numbers are often questioned by each side resulting in a question of a valid valuation.

The final valuation may be reached through negotiation, mediation or the result of a judgment issued by the Court itself.  It is not uncommon for parties to under-estimate or outright misrepresent the value of their business interests, and in some cases it is necessary to employ a forensic accountant to identify hidden accounts and sources of revenue that have not been fully disclosed.

What is Personal Goodwill and How Does That Relate to Business Ownership and Divorce in Kentucky?

“Personal Goodwill” is the impact that a specific person makes upon the success of ongoing business ownership and professional practices.  It is the impact the individual’s reputation, hard work, skill and relationships makes upon the profitability and income generated by a business.  In Kentucky, personal goodwill can be considered to be a marital asset and is subject to division just as other property jointly owned by the former spouses.  How valuation is divided between “enterprise” goodwill, personal goodwill and specific assets of the company can also affect taxation if the entity is sold during the course of the divorce or dissolution.

Can You Keep a Closely-Held Company or Professional Practice in Operation While Dividing the Marital Interest in the Business

It is absolutely possible to manage the division of the marital interest in an ongoing business or professional practice without interrupting the day-to-day operations of the business.

Once the valuation of closely-held Kentucky business ownership and professional practices has been established, the next step is to determine how to offset the value of the marital interest of the former spouse who does not own the business, without forcing the sale of the entity or severely damaging its operations by removing cash or other equity.

The Court will review the total list of marital assets and divide them accordingly.  While there may not be enough cash, savings or investments on-hand to offset this interest, other strategies may include equity in the family home (or ownership of the family home itself), increases in maintenance or other support, monthly payments, non-voting stock in the entity, or other securities that provide substantial value or secure the just division of the marital interest in the closely-held business or professional practice.

Contact Louisville Divorce Lawyers with Business Experience

Dodd & Dodd Attorneys, PLLC was founded in 1869 and has an established tradition of excellence, legal skill and experience.  Allen McKee Dodd has earned an LL. M., Master of Laws in taxation and advises clients on the legal process as well as the tax implications of the division of the marital interest in a business or professional practice during a Louisville Kentucky divorce.

If you are concerned about how business ownership and professional practices are affected by a Louisville divorce we invite you to review the recommendations of our clients and contact us or call (502) 584-1108 to schedule an appointment with one of our attorneys.