Partnership Chair
A business does not automatically have to be sold when its owner gets divorced. Instead, North Carolina courts determine whether the business, or part of it, is marital property, assign a value to the business interest, and divide that value through equitable distribution.
If you own a business or your spouse has an ownership interest, the outcome depends on several factors, including when the business was acquired, how it grew during the marriage, and how much of its value is considered marital property.
Is a Business Marital Property in North Carolina?
North Carolina follows the principle of equitable distribution. During a divorce, the court identifies marital property, values it, and divides it in a manner that is fair. Fair does not always mean an equal 50/50 split.
A business may be:
- Entirely marital property
- Entirely separate property
- Part marital and part separate property
For example, if you started a business before getting married, the original ownership interest may remain your separate property. However, any increase in value during the marriage may be subject to equitable distribution if marital efforts, marital funds, or both contributed to that growth.
Likewise, a business created during the marriage is often considered marital property unless a legal exception applies.
Determining how much of a business belongs in the marital estate often requires a detailed review of financial records, ownership documents, and the company’s history.
How Is a Business Valued in a North Carolina Divorce?
Before the court can divide a business interest, it must determine what that interest is worth. Business valuation is often one of the most contested parts of a divorce involving business owners.
Depending on the circumstances, a valuator may consider several accepted approaches, including:
- The income approach, which estimates value based on future earnings
- The market approach, which compares the business to similar companies that have sold
- The asset approach, which focuses on the value of the company’s assets minus its liabilities
The appropriate method depends on the type of business, the available financial information, and the purpose of the valuation. Because North Carolina generally values marital property as of the date of separation, the valuation date can affect the outcome. In many cases, multiple approaches are considered before reaching a final opinion.
Business valuators may also evaluate intangible assets, including goodwill, as part of determining the company’s overall value.
How Do North Carolina Courts Treat Goodwill?
Goodwill is the intangible value of a business beyond its physical assets. It may include an established reputation, customer relationships, and other factors that contribute to future earnings.
Business valuators often distinguish between enterprise goodwill, which is associated with the business itself, and personal goodwill, which is tied to an owner’s reputation, skills, or relationships.
Although this distinction may be useful during the valuation process, North Carolina courts generally focus on whether goodwill contributes to the value of the marital business interest. Recent appellate decisions have reaffirmed that goodwill may be included in a business valuation even when personal and enterprise goodwill are identified separately.
What Can Happen to the Business After the Divorce?
Most business owners want to continue operating their company after the divorce. Fortunately, selling the business is only one possible outcome.
Depending on your circumstances, the parties may agree to:
- One spouse buying out the other’s ownership interest
- Continue owning the business together after the divorce
- Sell the business and divide the proceeds
- Offset the value of the business by awarding other marital assets to the non-owner spouse
The best solution often depends on the business structure, available assets, the relationship between the spouses, and whether continued joint ownership is realistic.
Why Is a Business Valuator Important?
A business valuator provides an independent opinion regarding the value of a business interest. Their work often includes reviewing financial statements, tax returns, ownership records, compensation, and other business documents before preparing a valuation report.
In contested cases, the valuator may also testify in court and explain how the valuation was reached.
Protecting Your Business During Divorce Starts with the Right Guidance
A closely held business is often one of the most valuable assets in a marriage, and mistakes during property division can have lasting financial consequences. Whether you own a family business, professional practice, or interest in a larger company, understanding how North Carolina law applies to your situation is an important first step.
At Patrick, Harper & Dixon, LLP, we help clients address the legal and financial issues that arise when a business is involved in divorce. We work with financial professionals when appropriate and advocate for practical solutions that protect your interests. Contact us today to discuss your situation and learn how we can help.
