Divorce is never fun. In fact, it ranks just behind losing a child as the most traumatic event that can happen in your lifetime.
Throw in finances, and things just get crazy.
We’ve discussed issues such as alimony, child support and even some business valuations. As Kristen pointed out in her “Goodwill Hunting” piece, there are some issues with valuing a business when one person’s effort is the sole reason the business has value. It’s especially problematic when getting divorced.
Here’s an interesting twist: What if the business income is generated off of one of the spouse’s separate property?
An easy example would be rental properties. Consider if a woman enters into a marriage with a man and both work. The woman inherits some properties about five years into their marriage. The rents off of these properties are enough to replace both of their incomes, so they both quit their jobs.
Fast forward twenty-five years and they are getting divorced. Not only is the income generated off of the properties the only source of income, it turns out those properties make up the bulk of the marital assets. What to do?
Most laws disallow using discounted cash flow (future revenues) to value the business. But what else would you use? There is virtually NO goodwill, either professional or personal. The property is separate. So other than the fax machine and improper purchases that were deducted on the tax return, the business has no assets.
The best that can be hoped for is categorizing the gross profit as joint revenue and the husband should be required to pay some sort of alimony, as there is no way to gain any value from the business and divide it.
This is why whenever there is ANY significant financial event, you should consult someone who can look at your situation from the outside.
Or you could end up trying to find work in your old age.