Valuing the Assets and Debts of an Inherited Family Business in a Missouri Divorce
When two people get divorced in Missouri, they must divide many or most of their assets and debts. If either spouse owns a business, that is an asset that might be subject to division. The entire business could be a marital asset, or the divorce might only affect part of its value. A family business that the spouses started and ran together is clearly a marital asset. If one spouse inherited a business from a relative, the case can get complicated as Missouri law is likely to classify an inherited business as the separate property of the spouse who inherited it. An experienced family attorney can tell you about your rights regarding business assets and divorce. Read on to learn more about getting a divorce with a family business.
What Happens to an Inherited Family Business in a Missouri Divorce?
Missouri law identifies two kinds of property in a divorce case: marital property and separate property. Marital property includes assets acquired by either spouse during the marriage. Five exceptions apply:
- Property obtained as a gift or through inheritance
- Property obtained using other separate property, such as inherited money
- Property obtained after a court enters a decree of legal separation
- Property that both spouses have agreed in writing is not marital property
- The increase in value of a spouse’s separate property, except for any increase that resulted from “marital assets including labor.”
The fifth item on this list is especially important for an inherited family business. The business is separate property, but any increase in its value during the marriage could be marital property. The use of marital property to increase the value of separate property is known as “commingling,” as discussed further below.
How Do I Determine the Value of a Family Business’ Assets and Debts?
A financial professional, such as a business appraiser, can help with a small business valuation in a divorce case. Several methods are available to determine how much a business is worth. The most common method is “fair market value,” or the amount one could expect to get if they sold the business.
A simplified way of looking at the fair market value of a business is to take the total value of business assets and subtract business debts. This rarely tells the whole story, though. Assets may include real property, equipment, accounts receivable, trademarks, and patents. Debts may include accounts payable and outstanding business loans.
Assets and debts are important to divorce and business valuation, but they only provide a snapshot of the business at one moment in time. A business valuation must also take future prospects into account, including the following:
- Intangible assets like business goodwill or brand recognition
- Earnings capacity and the potential for growth, both in the business’ current market and additional markets
- The market for shares if the business seeks investors or goes public
- The experience and capability of the management team
A business that owns a large number of assets and has little debt might not be worth much if it has no business goodwill or growth potential. A heavily-leveraged business could be quite valuable if it has explosive potential.
Is an Inherited Family Business Subject to Division in a Divorce?
As mentioned above, Missouri law is likely to classify an inherited business as the separate property of the spouse who inherited it. An important exception may apply to all or part of the increase in the business’ value during the marriage.
Suppose, for example, that Spouse A inherited a family business valued at $200,000 during the marriage. By the time one of the spouses filed for divorce years later, the business’ value had increased to $1 million. The fifth exception to the marital property rule states that the $800,000 increase in value is also separate property, except to the extent that marital property or Spouse B’s labor contributed to that increase. If marital property was responsible for $400,000 in growth, then $400,000 of the business’ value would be marital property. Spouse B would be entitled to an equitable division of that amount.
State law presumes that property acquired during a marriage is marital property unless a spouse can prove otherwise. Here, Spouse A would have to prove that the business is separate property acquired through inheritance. They would also have to prove that the $800,000 increase in value during the marriage did not involve commingling with marital property or labor. Spouse B could present evidence of commingling in support of the increase in value being marital property.
Determining exactly how much of the increase in the business’ value was attributable to commingling is a highly subjective and technical question. Each spouse might have to present their own financial expert to testify about their opinions as to value.
Family attorney Mark A. Wortman practices in the greater Kansas City, Missouri area. He has dedicated his entire law practice to helping people who are going through divorces and other family law disputes. To schedule a confidential consultation to see how he can help you, please contact him today online or at (816) 523-6100.