When getting a divorce, one serious concern that will appear for those who own a family business, or a small business in general, is how to divide it, or even if division is necessary. Illinois law on the subject can get confusing, so it may be a good idea to consult an experienced attorney on the subject before moving forward with asset division.

Obtaining a Business Valuation

One of the first steps that can help a couple decide what to do with a family business is to obtain a business valuation, usually through an accountant or licensed appraiser. Without an accurate estimate of how much a business costs, one cannot accurately tell how the rest of the marital estate must be divided in order to keep a business in one piece, or how much must be offset if the business is to be sold and its profits and equity divided. There are, however, multiple different ways to accurately value a business, depending on the type of method used - the two most common in divorce-related cases are the comparable model and the asset valuation model.

When a couple decides to divorce, the assets and debts accumulated during their marriage will be equitably distributed to each party. Sometimes this means that assets are sold off so that they can be converted into liquid funds. On the other hand, Illinois law permits one party to be awarded the asset in lieu of receiving other marital assets. Dividing assets in the latter fashion is a very complex process if a family business exists. Ensuring that a proper valuation is reached so the business asset may be offset by other marital assets is a time-consuming and difficult process that requires the use of experts.

Illinois is a state that follows the equitable distribution theory of marital asset allocation in a divorce. What is a marital asset? Generally speaking, a business is classified as a marital asset if it was acquired during the marriage, and was not acquired by inheritance or gift. (Inheritances or gifts to one spouse are considered non-marital property by definition.) What is considered an equitable distribution? Each case is very different. Rather than simply selling all the assets and splitting the proceeds, some parties may prefer to be awarded a particular asset in lieu of another asset. A business, assuming that it is a marital asset, is no exception to this process. Sometimes one spouse wishes to keep the business, especially if it is a professional practice like a doctor’s office. A party may do so, but he/she will have to give up other marital assets in exchange for it. This means that an expert must place a value on the business before an equitable distribution of marital assets may be reached. .

How Is a Business Evaluated?

When a couple divorces, their shared property, income, and assets are usually divided between them. This can include a business that the couple created during their marriage or one that one of the spouses owned prior to the marriage, but continued to build while he or she was married. In many cases, each partner may have contributed at least something to the business and in some, it could have been both partners' sole source of income.

Every business is unique and there is no uniform way to divide a jointly-owned venture between two people. This is why it is important to educate yourself about business valuation and work with an experienced divorce attorney who has handled such divisions before.

Factors to Consider During Valuation

There are four important factors that come into play in a business valuation. They are:

There are multiple reasons that owning your own business is ideal. It allows you to be the boss and control your profits, employees and all other aspects of business. The first step in beginning a small business is a business plan. That means you have to know your product or service, your finances, and your ultimate goal. Unfortunately, if a prenuptial agreement, domestic asset protection trust or a partnership agreement isn't part of that plan, you hard work could be in danger.

The first way that a divorce can impact a business is through the division of property during divorce. Illinois is an equitable distribution and business assets are held as marital property as well. The court is allowed to split these properties as they see fit based on factors like length of marriage, contributions of the spouse to the marriage, and the age, health, and income potential of that spouse.

Without a premarital agreement there are other ways to protect your small business. The first step is acquiring an accurate description of your business and its assets. This is achieved by getting a business valuation that reviews the history of the business, current economy, financial records and other factors that give a business a value. Getting a proper valuation from a credible appraiser will ensure that the business owner doesn't pay too much for continued control of their business.