As a business owner going through a divorce , it’s likely something you dread. After all, you put your heart and soul into establishing your company. In some cases, the possibility exists that you started your business before you even met or married your spouse. A recent case explores the concept of determining the value of a business as a premarital asset.
The New Jersey Appellate Division decided Fox v. Fox on April 9, 2019. The fact that the court did not publish this opinion means that the ruling applies to the named parties. However, it is not precedential law, and its use in other cases is limited.
Edward Fox, III, and Catherine Fox met and moved in together in 1996. In 1999, the relationship ended, and they separated. In 2003, they rekindled their romance and ultimately married in July 2004.
Prior to the time they reunited, Edward began working as a bowling alley mechanic. In 2001, he decided to open a small business on a part-time basis. EBN Services, Inc. (EBN) is a bowling equipment company. For the three years before the couple’s marriage, EBN showed no profits.
Edward and Catherine decided to separate in 2012. A few months after Edward left the marital home, he contacted an attorney and presented a written separation agreement to Catherine for execution.
Although Catherine admitted she read the written separation agreement, she did not sign it. She could not afford an attorney to review the document. In the meantime, the couple made an oral agreement for post-separation support. Notably, they did not discuss how they would divide the monies from the bowling equipment company.
Equitable Distribution: Determining Business Value
Determining business value for the purpose of equitable distribution becomes an issue in divorce cases. However, in this particular matter, Edward argued that he wasn’t sure Catherine was entitled to any share at all. And, if she was, he disagreed with the lower court’s decision in dividing the asset.
You need some more background about EBN’s evolution to understand Edward’s logic. Consider some data culled from the court’s record:
|2001||EBN started as a part-time business|
|2001-2004||EBN in operation prior to marriage||0|
|2004||Tax Return Lists EBN’s Net Loss||($13,000)|
|2005-2008||Edward goes full time with EBN. No record of tax returns|
|2008||EBN’s gross sales up||$770,000||($20,000)|
In response to the downward economy, EBN regressed somewhat in 2008. In 2010, Edward faced some personal issues that interfered with his business. They resolved by 2011 and did not pose a problem going forward.
According to the case history, Edward comingled his personal and business funds for some period of time. However, in 2010, Edward decided to initiate a more formal approach as far as taking a shareholder distribution.
Upon review of the company books, an accountant determined the business had an average normalized officer compensation of approximately $45,000 between 2008 and 2011 and average actual distributions of around $23,000.
Wife Worked While Husband Ran the Business
According to Edward, Catherine made no significant efforts when it came to the business. Between the years 2005 and 2007, Catherine worked as a hairdresser and earned approximately $28,000 annually. Edward claimed she lost clientele, which may have explained her decision to change careers.
In 2011, Catherine started school to become a medical assistant. She continues to hold a part-time position she subsequently obtained in a chiropractor’s office.
Based on Catherine’s limited earnings and the numbers attributable to EBN, the court inferred that Edward assumed most of the couple’s financial responsibilities.
Coming to a Number as Far as the Business Value
In 2015, Edward decided to take the marital separation to the next step and filed for divorce. The couple hired an accountant together to put a number on EBN’s fair market business value. Presumably, at the request of the parties, the accountant considered the company’s worth at two different points in time.
According to the accountant, the business was valued between $43K and $56K in 2012, which date correlated closely to the couple’s separation. Using the date Edward commenced the divorced action, the accountant assessed the company’s value at $183K in 2015. She did not provide calculations as to the business value when Edward and Catherine legally married in 2004.
When the trial court equitably distributed EBN, it relied on the business value as of 2015. The divorce decree ordered Edward to pay half of the $183K in installments. However, Edward disagreed with the ruling and appealed.
Edward didn’t just dispute the amount of money he needed to give his former spouse. In the first place, he questioned whether the business should be subject to equitable distribution at all.
As far as Edward was concerned, he owned EBN prior to marrying Catherine. He argued that the company was property acquired before marriage and therefore, immune from equitable distribution.
While that might be true in some cases, the burden was on Edward to prove the immunity. The Appeals Court agreed with the trial court’s ruling that the company was an active-immune asset. In short, the business increased in value, partly due to Catherine’s indirect contributions. Catherine enabled Edward to devote time and resources to the company.
Meanwhile, another New Jersey case, Ryan v. Ryan offers more insight concerning the issue of premarital assets and immunity. The fact that Edward comingled the business and personal funds proved relevant.
The dates used to determine the business valuation represented another issue. Edward thought the court should use the date of separation. However, the couple did not sign or even have an oral agreement about the business in 2012. Thus, the Appellate Division agreed with the trial court’s determination to determine value as of the filing of the divorce complaint.
Was the Business a Premarital Asset at All?
On first glance, it could appear that the business was not at premarital asset because it had no value at that time. After all, EBN reported a net loss of $13K in the year the couple married. The trial court made this assumption.
Meanwhile, the Appellate Division disagreed, saying that “an unprofitable business may still have a positive fair market value.” In this case, the business had sales and a gross profit. The company also possessed inventory and two vehicles.
Should Edward receive credit for some amount of his premarital asset? The Appellate Division remanded the case to the trial court for determination. The first order of business requires an estimation as to EBN’s fair market value before the couple married.
Business valuation becomes a critical issue for many divorcing parties. At the Law Offices of Sam Stoia , we have experience representing business owners. Negotiation and an understanding of finances are essential to the outcome of these types of cases. Contact us to learn how we can help you.