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Small Business and Divorce

Gold border around a white square that says “Small Business & Divorce” in black lettersConnecticut is a state of entrepreneurs.  The U.S. Small Business Administration reports that small, closely-held businesses comprise 99.4% of all businesses in Connecticut.  Small businesses can play a significant role in divorces — especially high net worth divorces. 

But how do you value these businesses?  How do you divide them?

Read on to learn more.

Closely-Held Small Business Definition

A closely-held business is defined as one owned by only a few people who also control its operations. Because its shares aren’t publically traded, it’s difficult to value. Many Connecticut closely held businesses are professional practices — think physicians, attorneys, and accountants. Connecticut and federal ethics rules prohibit non-professionals from owning those businesses.

Law firms are a good example of this.  Only licensed attorneys can own Connecticut law firms.  That means that a law firm can only be sold or transferred to another lawyer.  Obviously, this limits who those businesses can be sold to.

Read: What is the Definition of Property?

Valuing Small Businesses in Divorce

Another tricky aspect when it comes to valuing small businesses in divorce is that some closely held-businesses have no value because they can’t be sold.  For example, a sole-proprietorship that exists to serve only one client cannot be valued because it’s impossible to sell.

When small businesses do have value, coming up with that value is complicated. Experts are hired due to the complexity. Sometimes spouses will agree to hire one joint expert in mediations and collaborative divorces.  In litigations, it’s more common for each spouse to have an expert.

The different valuation methods that experts use include:

  • Asset-Based Approach (Book Value) – basically the net asset value from the balance sheet
  • Liquidation Value – value of the business assets only
  • Comparable Sales Method (Market Approach) – based upon the sales of similar businesses
  • Discounted Cash Flow (Income-Based Approach) – forecast of the future income stream from the business
  • Capitalization of Earnings Method – average of the past net earnings of the business
  • Capitalization of Excess Earnings Method – focuses on the business’ goodwill

Read: 6 Preemptive Strategies to Protect Your Business From Divorce

Read: How is Property Valued in a Divorce?

Dividing Small Businesses in Divorce

The point of valuing a small business is so that you can figure out how it will play into property division. Dividing small businesses is trickier than other assets.  Using the example of the law firm above, the fact that only attorneys can own law firm is particularly significant in the divorce context because a non-lawyer spouse can’t be assigned any ownership of the law practice when property is divided.

Even outside the professional services context, the spouse who owns the small business typically does not want to share ownership with their ex-spouse. There are other complications when the spouses both own the business and are business partners.

Generally speaking, the goal is to get the non-business owner his or her share of the value of the business from other assets whenever possible.  In other words, one spouse may retain the business and the other spouse may receive more retirement or real estate assets. If there aren’t sufficient other assets available, creative solutions might involve increased alimony payments, or in some cases, even selling the business.

Read: What is Equitable Distribution?

Read: Business as Usual?: Changes to the Business You Own with Your Spouse After a Divorce

Next Steps

For more information about Connecticut divorce and family law, check out our Divorce Information and Facts.

If you have questions or want to learn more about how our team of divorce attorneys can help you with your divorce or post-judgment issue, please contact us either here or by phone at 860-530-4221.

Written by Meghan Freed