Protecting Your Business Interests in a Divorce

Divorce is never simple, and the divorce’s complexity may increase exponentially if you own a business. Whether it be a family farm, real estate, construction, or any other business entity, it is important for someone contemplating divorce to understand whether their business is considered marital property, what the value of the business is, and to learn how to preserve that entity through a divorce.

Learn more about how divorce affects business assets in Iowa.

Is Your Business Marital Property?

Your business may be marital property, depending on when you started your business. 

Under Iowa law, marital property includes all assets and debts acquired by either spouse during the marriage. In contrast, separate property is all assets one individual owned before the marriage and inheritances or gifts one spouse received during the marriage.

If the business was started before the marriage, it may be separate property. However, if the business value increased during marriage, that increase may be considered marital property, especially if marital assets or efforts contributed to the growth. Your spouse’s involvement may be considered. Providing administrative support or even managing the household to allow the other spouse to focus on the business, may all be considered contributions to the development of a business.

A business is more likely to be considered marital property if:

• You started the business after you were married.
• You used marital assets, funds, or loans to operate or expand the business.
• You commingled funds, or mixed business and personal finances.
• Your spouse contributed to the company, even without a formal or official job.

What Happens to Marital Property?

In Iowa, marital property is subject to equitable distribution, which means it's divided fairly between the spouses. However, fair division doesn't necessarily mean each party gets 50%. Iowa courts consider multiple factors in determining what's equitable, including:

• The length of the marriage.
• Each party's earning capacity.
• The tax consequences to each party.
• The property each party brought to the marriage.
• Whether one party dissipated or wasted marital assets.
• Each party's contributions to the marriage assets, including contributions as a homemaker.
• Whether to award the family home or the right to live in it to the party with primary custody of the children.
• Any written agreement between the parties concerning property distribution, such as a prenuptial agreement.

Marital assets are either divided in kind or offset. Division in kind means splitting the actual asset between parties. This is more common with easily divisible assets, such as bank account funds. Businesses, on the other hand, are less likely to be divided in kind and may be offset with other assets. While this division may look different in every case, a standard example would be one spouse keeping the business entirely, while the other spouse receives assets of equivalent value to offset their marital interest.

How to Determine Your Business's Value

An accurate business valuation is essential in divorce proceedings. It's often wise to hire a qualified valuation professional to get the most accurate value. Our family law attorneys regularly collaborate with Des Moines-area valuation professionals. Common methods use the value of assets, a historical view of income, or market value to determine the business value:

• Asset-based approach: This method involves determining the fair market value of the business's assets individually and subtracting any liabilities.
• Income-based approach: With this method, you estimate future cash flow and divide those expected earnings by a capitalization rate that reflects the risk of running the business.
• Market-based approach: This method compares the company to similar businesses that recently sold to estimate what the company would be worth if it were for sale.

How to Protect Your Business

The most effective way to protect your business in a divorce is to plan ahead with an appropriate business structure and a premarital agreement. However, if your company is marital property to be distributed equitably, you can structure the divorce settlement to minimize the impact on the business:

• Business structure: How you structure your business entity when you first create it may help protect the business if you marry and then divorce. It is important to speak with your business attorney to determine the best business structure for you and your needs.
• Pre- or postnuptial agreement: If you already own a business before you get married, a prenuptial agreement can set out your expectations for what will happen to the company during the marriage and in the event of divorce. If you're already married, you may be able to create a postnuptial agreement to delineate your wishes in the event of divorce. While postnuptial agreements are not currently enforceable under Iowa law, they may be taken into consideration as one of many factors in Iowa divorces.
• Buyout agreement: If your spouse has an ownership interest in the company, you can buy out their shares. You may be able to arrange a series of payments over time if you cannot afford a lump-sum payment to buy out your spouse's share of the business.
• Offset with other assets: As noted above, you can use separate, nonmarital assets to offset the value of the business. This is an excellent option if you can't afford to buy out your spouse, since you might be able to trade other assets for their interest in the business.

The Importance of Professional Guidance

Proactive planning and guidance are necessary to protect your business interests during a divorce. Seek professional advice early in the process.

A business valuation specialist, such as a forensic accountant or valuation analyst, can value your business accurately. Ideally, both parties hire one neutral professional and agree to use that person's valuation. However, each spouse may hire their own specialist, and the court will ultimately determine the business's value.

The court typically determines the company's value as of the divorce hearing or trial date, so having an accurate and current valuation is essential. An inaccurate valuation can lead to one spouse receiving significantly less or paying significantly more than they should in an equitable division.

To protect your business, it is important to hire a lawyer and a full-service law firm experienced in both business law matters and divorce. Consult with an attorney who can assess your situation and provide options to resolve your divorce satisfactorily.

Protect Your Business With Assistance From Whitfield & Eddy Law

If you're a business owner getting a divorce in Iowa, consider Whitfield & Eddy Law. Our attorneys understand the complexities of business law and family law. We can help you secure your financial future and keep your business running smoothly even during a divorce. Contact us online or call 515-288-6041 to see how we can help you.