A client once told me the business was “worth whatever my husband says it is worth, because he is the one who runs it.” She was wrong about the conclusion and right about the problem. In a high net worth divorce, the closely held company is usually the largest asset on the table and the only one that is still moving while the case is pending. The house does not renegotiate its own lease. The business does.
Most people assume the fight is about the appraisal. It rarely is. Two credentialed appraisers can look at the same company and land far apart, and neither of them is lying. What separates a good outcome from a bad one is understanding the choices made before, around, and after that number.
Which date the business gets valued on
New York does not use one fixed valuation date for everything. Active assets, the kind whose value depends on someone’s effort and decisions, are generally valued as of the date the action was commenced. Passive assets, the kind that move with the market, are generally valued closer to trial. A closely held company that one spouse runs is the classic active asset.
That distinction is not academic. If the commencement date falls just after a banner year, the non-owner spouse benefits unless the lawyers and valuators can show why it shouldn’t be the case. If it falls in the middle of a downturn or a lost contract, the owner benefits, unless again, you show why this isn’t the case. I have seen the choice of date swing a settlement by more than every other disputed item in the case combined. Ask about it in the first meeting, not after the appraiser has been retained.
What happens to the business while the case is pending
Divorces take time, and businesses do not pause. Between commencement and settlement, an owner spouse continues to sign contracts, hire, borrow, distribute, and decide what to defer. Most of that is ordinary course and entirely appropriate. Some of it is not.
The patterns worth watching are familiar: bonuses that suddenly stop and reappear after the judgment, a new entity that begins taking work the original company used to do, capital expenditures that swallow cash at a convenient moment, a long-time client “lost” to a friend.
New York’s automatic orders limit transfers outside the ordinary course of business, and there are remedies when they are ignored. But remedies require someone to have noticed. Get the statement of net worth and the underlying records, and then keep getting them as the case moves.
Whose lifestyle is running through the company
Owners run personal expenses through the business more often than they admit, and usually more than they remember. The car, the phone, the travel, a family member on payroll, the country club membership booked as client development. For tax purposes those choices reduce income. In a divorce they get added back, and they raise both the value of the company and the income available for support.
This is where a forensic accountant earns the fee. It is also where owner spouses get an unwelcome education, because the same deductions that looked clever in April become the proof of a higher lifestyle in a matrimonial case. On the other hand, a non-owner spouse who has never seen a general ledger should not accept a summary prepared by the company’s own bookkeeper as the final word.
The double dip, and why it comes up in nearly every business case
Here is the argument you will hear if the company is valued using an income approach. The value of the business was calculated by capitalizing the owner’s earnings. Then the same earnings are used to set spousal maintenance. The owner’s position is that the non-owner spouse is being paid twice out of one stream. The non-owner’s position is that a reasonable compensation figure was already deducted before the value was determined, so nothing is being counted twice. Make sure you know exactly what the case law shows.
If you are negotiating equitable distribution and maintenance in the same conversation, and you should be, the double dipping argument should not be missed.
Getting paid is a separate problem from being awarded
An award of a percentage of a company is not money. Nobody usually sells the business to fund a divorce settlement, so the non-owner spouse is usually taking a buyout paid over time, or trading the business interest against other assets.
That makes the payment terms part of the negotiation, not paperwork afterward. Over how many years, at what interest, secured by what, and what happens if the company is sold two years later for a multiple of the agreed value. A clawback provision, security, a life insurance requirement, an acceleration on default. These belong in the agreement itself. I would rather argue about them for months during negotiation than watch a client chase installments for a decade.
Professional practices are their own category
If the business is a medical, dental, legal, or accounting practice, or another licensed professional entity, the analysis will likely include review of buy-sell agreements and partnership documents that may fix a value for internal purposes, and that internal number is not automatically what the practice is worth in a matrimonial case.
What I would do before agreeing to any number
Establish the valuation date and understand who it favors. Retain your own appraiser rather than accepting the other side’s, and let that appraiser tell you the assumptions, not just the conclusion. Secure the financial records early and keep them current through the case. Ask how the appraisal handled reasonable compensation before anyone argues about the double dip. And treat the payment structure as seriously as the percentage, because a good number on bad terms is not a good result.
If a closely held business is part of your divorce, the questions above are worth raising early, while there is still room to shape the answer. To discuss your situation, contact an experienced attorney.