Ending your marriage is a painful process under the best of circumstances. When the property to be divided in an Arizona divorce includes a family business, the process has the capacity to become even more painful, not to mention expensive. Because approximately 90% of businesses in this country are family-owned, this is hardly an uncommon problem.
Division of Business in an Arizona Divorce
Dividing a family business involves a number of complications. In a community property state like Arizona, all assets are presumed to belong equally to both spouses. Dividing a business in half, unlike dividing a bank account or art collection, often destroys the value of the asset being divided. It often makes more sense for one spouse to continue operating the business, and the other spouse to receive assets in the property division that are equal in value to the business. This leads to another dilemma: valuing the business.
Some assets are relatively simple to value: bank and brokerage accounts have statements; real estate, jewelry, and art can be appraised. Businesses can, too, but their value includes more than just the value of tangible assets: there’s also the matter of valuing goodwill.
What is Goodwill, and Why is it Important?
In legal and business terms, goodwill is an intangible asset that represents the portion of a business’ value that cannot be attributed to other income-producing assets.
Imagine there are two hardware stores right across the street from one another. Each owns the building in which it operates, some equipment and fixtures, and of course inventory, all of which have similar values. But one store has been open in that location for two generations and is known to have friendly, helpful clerks who have worked there for years. If the two stores were placed on the market, that store would almost certainly bring a higher price. The reason is goodwill. People are familiar with the store. They trust it and feel welcome there. All other things being equal, they are more likely to shop there, even if they can’t articulate why. And that translates into a higher value for the business.
Approaching the Valuation of Business Goodwill in a Divorce
Naturally, the spouse keeping the business will want goodwill valued as little as possible, to avoid having to pay the other spouse more to buy their share of the business. Just as predictably, the other spouse will want the opposite. What’s the best way to avoid a protracted (and expensive) legal battle?
As in so many matters relating to an Arizona divorce, a little planning early can save a lot of pain later. If the business exists at the time of the marriage, the couple should execute a prenuptial agreement to address its division in divorce. If it’s created afterward, a post-nuptial agreement executed later can address the same issue. If the parties did not have an agreement, it’s even more important to work with an experienced Arizona attorney who can put the business-owner in touch with a reliable business valuation expert who understands the local law regarding goodwill. Such an expert s money, but the fee should be considered an investment that may well help avoid a long, ly legal battle over the value of the business.
The valuation of your business and its goodwill may be the most contentious issue in your divorce, so you need experienced representation. To learn more about how Shaffer Family Law experienced family law attorneys can help you, contact Shaffer Family Law online or call (480) 470-3030.