How can divorce affect a closely held company in Florida?

In Florida, a divorce can significantly impact a closely held company because business interests acquired during the marriage may be considered marital assets subject to equitable distribution.

Is a business considered marital property in a Florida divorce?

A business or ownership interest may be considered marital property if it was acquired or its value increased during the marriage, even if the business is solely in one spouse’s name.

How is a closely held business valued during divorce proceedings?

Closely held businesses are typically valued using professional business valuation methods, which may include income-based, market-based, or asset-based approaches, depending on the nature of the company.

Can a non-owner spouse receive part of the business after divorce?

Rather than awarding ownership, Florida courts often compensate the non-owner spouse through other marital assets or financial offsets based on the value of the business interest.

How can business owners protect their companies during divorce?

Business owners may protect their companies through proper planning, such as prenuptial or postnuptial agreements, shareholder agreements, and careful financial documentation.

Impact of Divorce on Closely-Held Companies in Florida

A divorce involving the division of a family business, professional practice or other business interest can be among the most complex and difficult divorces. If you are the party to the marriage who was primarily responsible for building and managing the business, you may be afraid that you will lose control of your business or that it will have to be sold so that your spouse can obtain his or her marital share of the business. By contrast, the party that focuses on other responsibilities in the marriage, such as raising children or caring for the family home, may fear that their spouse is undervaluing the business, hiding income, or otherwise engaging in conduct to prevent them from recovering their share of the business.

Protecting Your Business Interests in a Divorce

Absent a prenuptial or postnuptial agreement, a business established and developed during the marriage is likely to be affected by divorce. With proper planning, a party can reduce the adverse impact the divorce will have on the business. A party’s familiarity and understanding of how the law classifies personal and enterprise goodwill can be crucial. In Florida, personal goodwill is considered “nonmarital” and not subject to equitable distribution. Personal goodwill is directly linked to a party’s skills, reputation, and relationships. In contrast, enterprise goodwill is typically deemed a marital asset in Florida subject to equitable distribution under Fla. Stat. Sec. 61.075. Enterprise goodwill belongs to the business itself. Enterprise goodwill, defined as the value of a business “which exceeds its tangible assets” and represents the tendency of clients/patients/customers to return to and recommend the practice/company irrespective of the reputation of the individual practitioner/owner. Schmidt v. Schmidt, 120 So. 3d 31 (Fla. 4th DCA 2013). The business itself is marketable or transferable.

Courts typically rely on expert testimony from forensic accountants, business valuation specialists, and other financial analysts to opine on:

The previous, present, and projected earnings of the business.
The role of the party that is primarily generating revenue for the business.
Whether it is common practice for the business owner to execute a non-compete agreement upon the sale of the business, if so, what is the percentage value of the non-compete covenant of the business transaction?
Industry standards for operating the specific type of business.
Marketability or transferability of the business

The valuation of a business is calculated by determining the fair market value of the business, which is the amount for which a willing buyer and a willing seller would exchange assets, absent duress. Christians v. Christians, 732 So. 2d 47 (Fla. 4th DCA 1999). In determining a company’s fair market value, a trial court in Florida must consider all the company’s assets and all its liabilities.

There are three common methods or approaches in valuing a business in a Florida divorce:

Income approach: Examines future earnings and discounts these projected future earnings to present value.
Market approach: Compares the business to similar businesses that have been sold.
Asset-based approach: Net value of business assets after liabilities are deducted.

Each of the above methods has unique issues that may arise depending on the facts of the case. Often, the issue arises in carving out personal goodwill, if any, from the value.

Discovery

The discovery process is the most crucial and time-consuming aspect of a divorce involving a business. A forensic accountant or financial expert is often necessary to determine a value. There are also certain scenarios in which the business needs to be added as a party to the divorce.

Division of the Business

Once the value is determined, there are three options in dealing with a business during a divorce:

The spouse operating the business buys out the other spouse’s marital interest in the business. The spouse buying out the other spouse’s marital interest is the most common scenario. There are several ways to structure a buyout.
The business is sold, and the proceeds are distributed between the spouses. (Uncommon).
Continue joint ownership. (Uncommon).

Methods of Protecting the Business

If getting married, a prenuptial agreement is crucial.
If you are already married and forming the business, consider a postnuptial agreement.
If the business is created during the marriage and there are other partners or shareholders, a partnership or shareholder agreement with buyout provisions.
A trust (depending on the type of trust) could substantially limit the impact of the divorce on the business.