Dividing a Small Business
Family courts in New Jersey are charged with resolving claims for the equitable distribution of marital assets upon divorce pursuant to N.J.S.A. 2A:34-23.1. The goal of equitable distribution is to devise a "fair and just division" of the assets. Courts are guided by principles of equity in applying the statutory factors and in allocating the assets between the divorcing parties. When looking at assets, including a closely held business, the court does a three-step analysis to:
Identify property subject to equitable distribution;
Determine the value of the property; and
Allocate each asset pursuant to the factors set forth in the statute.
Identification of Property: The first step is to determine whether the business interest is marital property. If the business was acquired during the marriage using marital funds it is generally considered marital property f it was acquired before the marriage, or through inheritance or gift, it may be exempt from equitable distribution. However, even if the business predates the marriage, if it appreciated in value through marital efforts, there is an argument that at least a portion of the business is a marital asset.
Valuation of the Business: The business must be valued to determine its worth. This is typically done by a business valuation expert who will consider factors such as the company's income, assets, and market conditions. There are various approaches that can be used to correctly capture the value of a business. In the event the business in question deals primarily in cash, forensic analysis can be employed if the cash has not be properly reported.
Allocation of the Business Interest: Once the business is valued, the court will decide how to equitably distribute its value. The court will consider factors such as each spouse's contribution to the business, the length of the marriage, and each spouse's financial needs and abilities and the other factors listed in N.J.S.A. 2A:34-23.1. The actual mechanism for distribution can vary, and may include a buyout or even a sale of the business.
The Courts recognize that the spouse who does not work in the business may still contribute to the success of the business in many ways. This includes the essential supportive role played by the spouse in the home even when that spouse is not actively engaged in operations of the business. Equitable distribution of the business serves to recognize the contribution of each spouse to the acquisition of marital property. In the view of marriage as a partnership, property, including the business, should be fairly distributed when the partnership breaks up.
In looking at the business, one party may claim that the business was acquired before the marriage and should be excluded from equitable distribution. If so, that party has the burden of proving that the business was a premarital asset. However, the court’s inquiry does not stop there. Even if the business is premarital, the other spouse can still argue that any increase after the marriage should be subject to equitable distribution. In order to do so, three things must be shown:
There has been an increase in the value of the asset during the marriage;
The asset had the capacity to increase in value as a result of the parties’ effort; and
The increase in value can be linked to the efforts of the non-owner spouse.
Increase in Value: It will be necessary to determine the value of the asset at the time of marriage and at the time of complaint (or possible, the time of distribution) to calculate the change.
Capacity to Increase in Value: Assets may be either “passive” or “active.” Passive assets are those assets whose value fluctuations are based exclusively on market conditions. An active asset involves contributions and efforts by one or both spouses toward the asset's growth and development which directly increase its value.
Efforts of the non-Owner Spouse: The non-owner spouse can contribute to an asset’s appreciation in a number of ways. For instance, a non-owner spouse can be actively engaged in the operation of the business or can provide the necessary support that allows his or her partner to devote time and energy to a business. The increased value of active assets must be considered eligible for equitable distribution to the extent that it is a result of the expenditures or the effort of the non-owner spouse.
Issues involving equitable distribution of a business can raise complex issues. The attorneys at Maleski, Eisenhut & Zielinski, LLC are available to assist you to carefully review your situation and help you assess your rights and claims.