Posted on June 3, 2021
Confused divorcing couple in Brentwood TN

If you are divorcing and own a start-up business, you need to understand your options for valuing the business.  The most important point is the value a start-up business can be very different from the value of a business that has been incorporated for 20 years.  Many times a young business has more debt than assets. 

On a recent case, a divorcing couple had a start-up business.  The Wife's divorce attorney stated Wife should get half of the shares of the business in the settlement.  Since the business was a marital asset, this seemed fair to the attorney.  The problem with this logic is the business has no value at this time and the shares have no value.  The tax returns have consistenlty showed a loss.  Additionally, if the Wife kept half of the shares of the business, the husband would not have a controlling interest. 

The business is about to seek venture capital to invest in technology.  But, the evnture capital company does not want to invest in a company where the Husband does not control the business.  With the infusion of venture capital, it is likely in the future, the business will show a profit and if it is sold in 10 years, the selling price may be $0 or as much as $25,000,000.  Who knows the future?

Why should the Wife recieve half of the shares and future value of the company when sold if she is not working there or, contributing and has not worked there or contributed during the marriage?  CPAs tell me the value of the business at the time of the divorce is what should be divided, not a future value.  Other divorce attorneys have also confirmed the value of the business at the time of divorce is the value to be divided.

To illustrate the point, it is helpful to consider a house value.  If the couple owned a house and the Husband wanted to keep it, an appraisal would determine the current value of the house.  The Husband would buy out the Wife's current interest in the house.  He would not buy out the future value of the house or what it would be worth in 5 years.

So, why did the Wife's divorce attorney give the client legal advice that was different from every other professional (CPAs and divorce attortneys)?  Because the Wife's attorney was advocating for her client and the client was paying her attorney's legal fees...  In short, I think the attorney was telling the client what the client wanted to hear.

In the end, the Wife's divorce attorney acknowledged she was wrong in her approach.  It was agreed the current value of the business was $0.  This was after many many hours of attorney fees were spent discussing this subject.  In my experience, these lengthy legal conversations were not necessary or beneficial to the client.  The attorney had been practicing divorce law for 35 years.  This was not her first divorce case or first business valuation.

If you are divorcing and own a start-up business, I suggest you use some common sense in assessing the value of a business rather than blindly following an attorney's legal advice (when it is counter to other professional's advice).  Sure, leagal advice is required but, use common sense too and control legal fees to get a financially smart divorce.