Virginia boasted of 745,886 small businesses in 2019, according to the U.S. Small Business Administration. Together they accounted for 47.2 percent of all Virginia employees. The odds are, if your wife owns a Virginia business, she owns a small business (fewer than 500 employees). And, odds are, if you and she are divorcing, you have your eye on that business.
Who’s Who In Business
Whether you are entitled to a portion of her business interest depends on whose business it actually is. If she owned and held the business before you two became husband and wife, the courts are likely to say it is “separate property,” which in Virginia means it stays in her hands.
The caveat to that is that you and she may have, in the course of your marriage, materially contributed to the business. Did you give up a vacation to roll that money back into her business? Did you take a bonus from your job and help her buy inventory? Is part of your marital home dedicated to her business? Have you ever shown up at her storefront shop to give her an impromptu “massage” (from the neck up or the waist down — that’s your … er … business) to relieve business-induced stress?
If you contributed either materially (cash, time, product) or intangibly (creating an atmosphere of blissful serenity at home because her business is the emotional equivalent of pulling out nose hairs one at a time all day long), you may be entitled to a share of her business. The business could be considered marital property by reason of your “personal effort” under Code of Virginia § 20-107.3:
“Personal effort” of a party shall be deemed to be labor, effort, inventiveness, physical or intellectual skill, creativity, or managerial, promotional or marketing activity applied directly to the separate property of either party.
To make this argument stick, you and your family law attorney have to show that your “personal effort” a) helped your wife’s business increase in value and b) were actually made.
We Built This Business Together
If you two started a business after you married, even if you are more or less a “silent partner,” your attorney has a strong case that the business is marital property. It will be divided equally between the two of you, under the same Virginia Code.
Say, a year into your marriage, you agreed to invest in her business startup with $15,000 you had saved from your year’s paycheck (not from inheritance or savings started before you married). You expect her to run the business, but without your investment, she would have no business. It does not matter that you are not behind the counter, that you continue with your own job, and she handles every aspect of “her” business.
If you can show that you paid into the business and had a material role in its existence, proving this in Circuit Court is fairly easy. The business will be a marital asset.
What is the Value of this Business?
The American Bar Association (ABA) provides a brief introduction to this very question, because so many divorcing couples also are small business owners. Once you get past the hurdle of determining if the business is a separate or marital asset, you then have to agree with your wife on a value for the business.
Her attorney will work to lower the valuation while yours works to increase it. Three methods for determining fair market value are:
In the hands of a trained professional —the ABA suggests an Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), or Certified Public Accountant (CPA) with an Accredited in Business Valuation (ABV) designation — the business can be valued for purposes of the divorce.
Is That Really What You Want?
You will have three choices once the business’s value is determined:
- Sell the business and divide the proceeds
- Buy her out or allow her to buy you out
- Run the business as co-owners
Unfortunately, some Virginia men get dollar-sign eyeballs in a divorce, thinking they will “stick it” to their wives by nickel-and-diming them. Do not do that. Be absolutely sure of what you want from the divorce. With a weak or failing business, you probably want to walk away quickly. Go for Option #1. If she believes strongly in her business model, consider letting her buy you out, Option #2.
If, though, you both see a practical benefit from remaining business if not life partners, keep your interest in the business, even after divorce. Having a steady income from “her” business may be very helpful in the uncertain road ahead.
From simple separation to difficult divorce, The Firm For Men stands ready to work with you to protect your financial interests. We serve Virginia’s men in all aspects of family law. Contact us today, or telephone our offices at 757-383-9184.