Division of business interests in divorce, business division

Division of business interests in divorce, business division

Business is flourishing. Unfortunately, your marriage is not. You are in the middle of a divorce.

Entrepreneurs, pay attention. A divorce can be expensive and even threatening to the existence of your business, especially if you have not taken any precautions. Your life’s work is at stake. You risk dividing the business assets. In the worst case, a division of assets may entail selling the company if, for example, you cannot buy out the other spouse.

By the same token, do not slaughter a cow that you want to milk. It is in the interest of both spouses to maintain the business.

The assets usually belong to the family business and are not stored in the bank as cash. Dividing a business financially is a complicated question. Spouses often cannot agree on the value of the business because of different stakes. While one person wants to claim as much as possible, the other person wants to pay as little money as possible as compensation.

Matrimonial contract and other agreements

The decisive factor is whether a company is to be divided, and if so, at what value. Various contracts can influence this. You should clarify in advance as to whether there is a prenuptial agreement and other agreements regarding the company (such as a shareholders’ agreement, right of first offer, right of first refusal, voting agreements).

Matrimonial property regime

Participation in accrued gains

In the absence of a marriage contract, married couples are subject to the matrimonial property regime. In a matrimonial property settlement, each spouse retains his or her individual or separate property, and the accrued gains are divided in half or each spouse is entitled to half of the other spouse’s accrued gains, thus also entitled to half of the value of the company.

Investments lead to compensation claims. The same applies to the reinvestment of retained earnings.

Assigning the business

It is decisive whether the business is characterized as accrued gains or individual (aka separate) property. The key is to determine when the company was founded, how it was financed.

The individual property (aka personal property)

If the business was established before the marriage, it is part of the entrepreneur’s separate or individual property. Likewise, if the entrepreneur inherited the business.

The gains accruing during marriage

A business is considered accrued gains if the entrepreneur started the business during the marriage.

Valuation date

When the petition for divorce is filed, the inventory of assets to be divided is fixed. However, the valuation takes place at the time of the dispute. Between the initiation of the proceedings and the divorce decree, time can pass. Changes in value must be accepted.

Valuation of the business at fair market value

In principle, a company is valued at its fair market value. If the company is sold, the proceeds of the sale shall be divided. Without a sale, the company is valued at the going concern value or liquidation value, depending on whether it will remain in business or be liquidated.

Sole propietorships are individual-related. Customers are not always transferable. Only the business-related earning power is realizable. What price is a buyer willing to pay for the business-related goodwill?

How do you determine the value of a business? You or the judge hire a business valuator. This will be expensive, but worth the money invested.

The spouses can either agree on the value of the business. Otherwise, the judge determines the valuation standard: there are different methods, such as asset valuation or going concerns/share valuation. The net asset value method involves adding up all the assets and then deducting borrowed capital. Asset valuation is suitable when the company is not so well performing. Consequently, its assets are the main source of its value. The capitalized earnings value method is based on the future profit of the company. A share valuation or going concern valuation is appropriate if the business is doing well. The practitioner’s method takes into account both methods, the value of equity, as well as future profits.

Working in the company

In family businesses, the other spouse often contributes. This may be with or without an employment contract. If an employment contract exists, claims such as wages, vacations and overtime may exist. Even without an employment contract, a claim to appropriate compensation may be owed in accordance with Art. 165 para. 1 of the Civil Code in the event of substantial collaboration.

Proceeds of gainful employment, enterprise profit disbursed

The accrued gains of a spouse also include without limitation the proceeds of gainful employment. Thus, wages, commissions, interest, dividends, bonus shares, rental income from real estate and income from intangible property rights.

Profits that have been distributed in the form of dividends are accrued gains. They have been transferred to private assets and are no longer part of the value of the company.

Increase in value due to retained or undistributed profits

Profits are often retained in the company (so-called retained earnings). These increases in value may be industrial or cyclical in nature, depending on whether they would have occurred even in the absence of economic activity.

Industrial added value or cyclical added value

The industrial added value is created by labor. Cyclical added value, on the other hand, refers to market-driven value growth, for example, when a commercial property increases in value over the years.

We have to determine which assets are affected by the increase in the value of the enterprise. The industrial added value is included in the accrued gains. The cyclical added value, on the other hand, remains in the assets from which it originates.

The division of a business, its valuation, its allocation under matrimonial property law and other issues (uncompensated entrepreneurial wages, work performed by the spouse, value-added claims, etc.) are complex. Seek advice and make an appointment today.