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Owning a Business can be tricky in a divorce

Dear Carolyn:

I am involved in an equitable distribution case and I have a closely-held business in the Triad, which was started by my father. He still owns the majority of the business.  Eight years ago, my father gave me twenty-five percent of the business. I separated from my husband eight months ago. What can I expect in my divorce case related to my closely held business?  How do we go about getting a appraiser to appraise the business?  Can he get any of my stock in the family business?

Carolyn Answers….

 You ask a complex, but very interesting, question.  Rest assured that he cannot get any of the actual stock in your family’s business.  The stock itself is separate property because it was given to you by your father.

However, there may be a component of marital value if there is active appreciation. There must be growth in the value of your twenty-five percent for there to be active appreciation.  With the recession and the short length of time you have owned your business, there may be no appreciation, which is the first position you should review.

There may be two types of appreciation of separate property:  1) active and 2) passive.  Passive appreciation is growth related to inflation and other market forces, as defined in the famous equitable distribution and divorce case involving Bruton Smith and his ex-wife over the Charlotte Motor Speedway and some car dealerships. You will want to build your case around your business growth, if any, being related to forces beyond your control, such as inflation. Passive appreciation of separate property is NOT divided in a divorce.

Active appreciation of separate property, however, is valued in a divorce and relates to growth related to active participation in the business. You do not say what you do for the business, but if you are the decision maker and the business grows, then the value related to that growth is divided in the divorce either by giving the other spouse more of some other asset, such as the home, or giving the other spouse an offsetting cash award called a distributive award.

How much growth of a separate property business is active and how much is passive is calculated by a business appraiser and presented to the court in the form of expert testimony. The calculation can be quite complex.  Your attorney would work with your business valuator to determine the best way to present the value of the active and passive appreciation of your separate property business.