How Does Divorce Affect A Business Partnership?

During your marriage, your spouse opened up a professional practice and over the years it has grown. You are now getting divorced and your question is, are you entitled to any part of this business? In New York, it is clear that professional practices (law firm, medical, dental etc.) established during the marriage and prior to the commencement of a matrimonial action or execution of a separation agreement is marital property and subject to equitable distribution. Additionally, even if the practice in question was established before the marriage, the appreciation of value of the practice, where there have been contributions by the non-professional spouse, is marital property subject to equitable distribution. What will not happen, however, is that you are awarded interest in the practice. For example, if your spouse built a law practice and you are not an attorney, the Court will not say that you are now a partner of the practice. What the Court will do is to value the practice and award an offsetting interest in the other property to the non-professional spouse or, if those funds insufficient, order a distributive award to the non-professional spouse.

How will the Court value the practice? The court will analyze the value of the tangible physical assets. In addition, it will look to the good will of the practice including earnings and liabilities. The Court will use the following factors: 1.) the nature and history of the business; 2.) its particular economic outlook and that of its industry generally; 3.) the book value of the stock and the financial condition of the business; 4.) the company’s earning capacity; 5.) its dividend paying capacity; 6.) its goodwill and other intangible assets; 7.) other sales of the corporation’s stock; and 8.) the market price of stock of comparable corporations.

There are many methods of valuing good will and a particular practice. The most common is the capitalization of earnings approach, which is a weighted average of annual earnings received by the professional spouse in excess of reasonable compensation, reduced by the value of the return on tangible assets, and applied to a capitalization rate. The Court will be mindful of abnormally high and low years of earnings. The valuation will also take into account marketability, or lack thereof, of the professional business in question.

LEARNING POINT: There are many methods of valuating a practice which you and your spouse have built while you married. The practice will be part of the equitable distribution of the marital estate. It is important to start the valuation process as soon as possible, so hire an attorney to protect your interests as soon as possible.

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