A business is an asset. Just because one spouse acquired a business interest before the marriage does not mean that it, or part of it, is not going to be considered marital property. In Illinois, business interest is subject to equitable distribution if:
• the business ownership was acquired during the marriage;
• there was an increase in value of the business (even if ownership in the business was acquired before the marriage the non-titled spouse may be entitled to reimbursements for any contributions made towards the business); and/or
• assets were acquired by the business during the marriage (such as expanding operations or purchasing another business).
The value of this marital asset is based on the actual, monetary value of the business and the goodwill of the business. A prenuptial agreement is a great way to address business ownership in the case of future divorce and avoid the costs of (often multiple) business appraisers.
Valuation is key in deciding how much business interest is marital property. Accordingly, there are several approaches to valuing business interest in a divorce.
1) The Market Approach: Looking at purchase history of similar businesses and seeing what they sold for to estimate what the current business might sell for. In other words, you are using the current market to determine the estimated value. (This is the most commonly used method.)
2) The Income Approach: Looking at current earnings over time to determine future income.
3) The Discounted Income Approach: Looking at cash flow over time and in various points in the future. The cash flow is “discounted” by different risks the business might take. This is a little different from The Income Approach.
One or all three of these approaches may be used with valuing a business in a divorce. The value of the business interest should be determined at the time of dissolution of marriage. In re Marriage of Stone, 155 Ill.App.3d 62 (4th Dist., 1987).
Goodwill is based on the brand of the business- its reputation. This is more difficult to value. If the “face” of the company is one person in particular and this is the goodwill component (commonly called the “personal goodwill”, versus “enterprise goodwill”), it most likely will not be a marital asset. See In re Marriage of Talty, 166 Ill.2d 232 (1995), In re Marriage of Schneider, 214 Ill.2d 152 (2005). However, to avoid “double dipping”, goodwill will either be considered a marital asset or used in determining support-not both. See In re Marriage of Zells, 143 Ill.2d 251 (1991).
There are many cases where the courts have ruled that business interest is not a marital asset. When business interest in a bona fide gift, for instance, it is non-marital property. See In re Marriage of Romano, 2012 IL App (2d) 091339 (2nd Dist., 2010) (where shares in a family owned liquid-distribution company were gifts, which are exempt from marital property). Additionally, In re Marriage of Werries, 247 Ill.App.3d 639 (4th Dist., 1993) the husband’s interest in a hog-farming partnership was not marital property where he acquired his 45% interest prior to the marriage and, even though some equipment was acquired during the marriage, the income of partnership was not attributable to the efforts of the Husband or the Wife, the Husband maintained separate the business assets and marital assets, and the marital estate was adequately compensated for any of Husband’s personal efforts in the partnership.
Even if any business interest is not marital property, it will most likely be valued anyway, since courts consider the value of non-marital property when dividing marital property.