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Sunday, October 12, 2014

Starrett v. Starrett - Valuation of a Family Business in Divorce

Divorce is not known for bringing out the best in people, which is not great news for your family business. But you both have an interest in ensuring the breakup doesn't ruin your livelihood, and hiring an experienced family law attorney who can help you keep a level head at a time when emotions are running high is important.

One of the key things you want to do is figure out - or perhaps negotiate - the future of the business. That means, are you going to continue to co-own it? Are you going to jointly sell it? Will one party buy out the other?

Before reaching an agreement, you may want to consider waiting until the formal business valuation is complete. This is the process by which outside experts determine what the company is worth, what is projected to be worth, what share belongs to each spouse and all the relevant tax implications.

Consider that in many marriages, the family business may be the most valuable asset in the marriage. It may also be the most illiquid asset, meaning it's not easily sold or exchanged without substantial loss in value. This is why it is often such a point of contention. Our experienced Bronx divorce lawyers can help.

An example of how these cases can unfold was shown recently in Starrett v. Starrett, which was reviewed recently by the Maine Supreme Court.

Here, according to court records, the pair married in 1980, raised two children into adulthood together and then separated in 2010 after 30 years of marriage. It was an acrimonious uncoupling, with the wife seeking an order for protection of abuse and the husband seeking a protection from harassment notice. Ultimately, however, the pair managed to work out most of the details of asset division prior to appearing before a judge. They even worked out a spousal support arrangement, payable from husband to wife.

The one issue of dispute was the family business, a drywall company the husband started and worked for since the 1990s. Although both parties had benefited from the company, it was the husband who had worked for the firm through its entirety.

At its peak, the company employed 40 workers and grossed several million dollars annually. However, it had been struck hard by the economic downturn, and both parties disputed what it was actually worth. They jointly hired an expert to issue a determination. However, the expert had a tough time reaching an actual figure, indicating the real value in the company was the husband's willingness to work.

Still, he affixed a value of $400,000. Husband disputed, saying he would sell it for half that. Wife insisted it was worth at least $50,000 more. The court disregarded the expert witness's report and found the business to be essentially worthless, as it calculated the debts to be greater than the assets. It awarded the company (and all related debts) to the husband.

Wife appealed, arguing the court had incorrectly calculated the value.

On appeal, the Maine Supreme Judical Court agreed that the trial court was wrong. In fact, the company did have a net positive value (albeit a relatively small one). Still, it was not expected to return to the pre-recession size it once held, and its greatest value was still the husband's willingness to work. Therefore, the court found the error did not otherwise prejudice the wife and allowed the trial court's ruling to stand.

If you are contemplating a divorce in the Bronx, call our offices at (718) 864-2011.

Additional Resources:

Starrett v. Starrett, Sept. 18, 2014, Maine Supreme Judicial Court

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