Business Assets in Divorce Cases
Georgia courts have stated the rules of equitable division. The equitable division of property is an allocation to the parties of the assets acquired during the marriage, based on the parties' respective equitable interests. The purpose behind the doctrine of equitable division of marital property is "to assure that property accumulated during the marriage be fairly distributed between the parties. Only property acquired as a direct result of the labor and investments of the parties during the marriage is subject to equitable division. A property interest brought to the marriage by one of the marriage partners is a non-marital asset and is not subject to equitable division since it was in no sense generated by the marriage (However the appreciation of such an asset during the marriage may be found to be marital property.
A business that either was started during, or appreciated in value during the marriage due to efforts of a party or the parties is subject to equitable division. Interests in corporations, LLCs, or partnerships can be awarded to the other party (under present GA law on partnerships, conveyance of a partnership interest does not dissolve the partnership, unless the partnership agreement provides for that, OCGA §14-8-27).
A buy-sell agreement may call for a buyout of the business interest in event of divorce. However, such an agreement is not binding on the court as far as the value of the interest.
If a company is incorporated, the court cannot award assets owned by the business directly to the other spouse. The court can look to what income is realized from the corporation by the owning party, and also whether the corporation does not distribute income but reinvests it, which can increase the value of corporate shares.
The court can award shares of stock to the non owning spouse. The court can award cash payment for the business interest rather than a direct award of part of the business interest. Also if one spouse is awarded a valuable business, the other spouse can be awarded proportionately more property to balance the division equitably.
The three accepted methods of business valuation are the income or capitalized earnings method, the market approach method, and the cost or asset approach. The trial court has the discretion to choose which valuation method it will employ.
Three principal methods can be used for developing a value for ownership in a closely held corporation. Those are the income or capitalized earnings method, the market approach method, and the cost approach method. Courts have stated that business valuation is an art rather than a science, and requires consideration of proof of value by any techniques or methods which are generally acceptable in the financial community and otherwise admissible in court.
If a business owner owns less than a majority of stock, in a small corporation, this affects the value of his or her stock (this does not apply to publicly traded stock). The stock of a minority owner may be worth less because this shareholder does not control the company, and the difference in value is known as a minority discount. The Supreme Court of Georgia has recognized that there is little market for sale of a minority interest in small corporation stock unless the majority shareholders wish to buy it. In a divorce case the court may have to equitably divide the business shares, and the court must calculate the value to do so. Trained financial experts often are used to calculate the value for the court. Business valuation experts can apply a minority discount in valuation of company stock if it is a minority interest. Other discounts can be applied to corporate interests that are not publicly traded, and these are known as marketability discounts.
Lack of marketability of the privately held stock can be proved by a valuation expert, business broker, or experienced court receiver who has handled liquidation of minority interests in business. Use of these discounts is important in reaching a fair market valuation of stock of smaller privately held corporations, and especially for minority interests in privately held corporations.
A competent expert will point out that in divorce cases; the concept of fair market value is used in the valuation of property. This is different from the concept of fair value, which applies in dissenting shareholder cases. Discounts are more frequently used in divorce cases.
As there may be no practical way to convert the minority interest into cash for immediate distribution. If there are sufficient other marital assets the court can award some of those to the non-owner, to balance allowing the owning party to keep all of the business interest. Or, the court can award a share of the business to the non-owning party. However, the other business partners or shareholders are often averse to having a former spouse of an owner as a co-owner with them. The court can award some interest in the property and some cash or other property.
Many times a business owned by a party to a divorce is the largest marital assets, and care should be taken to have sound legal representation and accurate expert valuations to achieve a fair result.