Chryssikos Law Firm

Divorce & The Family Business

Many people confronting a divorce face complex questions.  Those who own a business that serves as the family’s primary source of income have unique challenges in reaching a fair and equitable outcome. Often, the business is the most significant asset in a marital estate, causing concern over how to determine and divide the value, without diminishing its value or losing the business altogether.  The challenges are different for each spouse, depending upon which one intends on maintaining ownership of the business after the divorce.

From the perspective of the non-owner spouse, there are concerns over how to determine the owner-spouse’s true income, how to place a value on the business itself and how and when does the non-owner get paid?

Likewise, from the owner’s perspective, some of the concerns may be how reach a fair settlement with the spouse without getting into hot water with the IRS, especially if the income reported to the IRS is different than what is disclosed or determined during the divorce?  Also, how can a fair business value be determined without forcing a sale or causing upheaval of the business?

These issues are discussed, debated, and litigated on a daily basis in the Family Court.  The first thing to understand about a divorce case involving a family business is that in nearly every case, it is critical to retain the services of, not only an attorney, but also an expert certified in business valuations.  So a spouse is now confronted with the first critical question of the divorce, whether to retain his/her own expert or to retain a joint expert.

Hiring your own expert means that the expert will work together with you and your attorney.  The expert would have no duty to the other spouse and will serve more in the role of an advocate on your behalf.  This typically means both parties hire their own expert and paying two sets of expert fees.  By contrast, a joint expert “serves two masters”, meaning there is little or no advocacy other than arriving at the most accurate figures.  Whether or not to retain your own expert or hire a joint and neutral expert is a discussion you should have early on with your attorney.  A benefit of having a joint and neutral expert is usually reduced cost by paying one expert rather than two.

Next comes the issue of valuing the business.  A family business is an asset like any other property a divorcing couple owns.  But unlike other assets or property, the value of a business can be determined using any one of three methods.

The first and most commonly used method is the “Income Based Approach”.  This approach assumes that the business owner will continue to operate the business after the divorce and determines the value of the business to the owner based largely upon the income that it produces for the owner.  It is important to note here that “income”, for purposes of business valuation, is not limited to the adjusted gross income reported on a tax return.  This method is preferred in most cases because it eliminates the concern invariably raised by the owner-spouse, which is “I could never sell the business for that amount”.  Again, the value is determined by the income it generates for the owner, not based on market value, which is addressed below.

This leads to the second method of valuation, the “Market Based Approach”.  This method seeks to determine what is the fair market value of the business?  In other words, if the business were sold, what price would it fetch?  This method is less commonly used unless there is a strong likelihood that the owner will in fact sell the business and has taken steps toward selling the business, or in the somewhat unlikely event that the market value is higher than the value under the Income Based Approach.

The third and final method to valuing a business is the “Asset Based Approach”.  This is also commonly referred to as the “Liquidation Value”.  This approach looks at the value of the assets of the business, including equipment, vehicles, inventory, etc.  This approach would almost never be used except in cases where the business is failing, generating little or no income, and is not likely to continue to operate.

Courts will generally agree that the valuation method suggesting the highest value is the correct method.  In other words, if the non-owner’s expert reports a value of $1 million using an Income Based Approach and the owner-spouse’s expert suggests that, under the Asset Based Approach, assets of the business are only $50,000, the court is generally inclined to find that the Income Based Approach is the appropriate method unless there is some reason to suggest that the business can no longer operate (unlikely when the business is generating substantial income).

If the parties are unable to reach an agreement, the court has the ultimate duty to determine which method is appropriate and which expert’s opinion will prevail.  Whether the parties agree on a value or the judge decides the issue, the next step is to determine how the owner-spouse will pay the non-owner spouse for the value of the business.  If there are other assets in the marital estate equal in value to the business, then allocating those assets to the non-owner spouse may be appropriate as a buyout.  If not, there may need to be a payment schedule over a period of time, sometimes with a reasonable interest rate applied to encourage prompt payment.

Where a payment schedule is needed, there are two more major considerations.  First, how much will the payments be and how long does the non-owner spouse have to wait to receive full payment.  The non-owner spouse should not be expected to wait until he/she is in advanced years before receiving payment in full.  Conversely, the payment obligation must be manageable to the owner-spouse.  Again, experts and experienced attorneys can assist in this process both by commenting on a reasonable payment, rate of interest and term.

Generally speaking, determining the owner-spouse’s true compensation is a by-product of the business valuation process.  That compensation may then be used for determining child support and spousal support obligations, where applicable.

Divorces involving a family can be more time-consuming than other divorces.  They may be more labor intensive to the parties, attorneys and experts.  But experienced legal counsel and experts will be able to help navigate you through these frequently treacherous waters.  A good attorney will assist you in finding the right expert, of which there are many in the Detroit Metropolitan area.

Attorney James Chryssikos has represented many business owners and spouses of business owners in divorce and family law matters in Wayne, Oakland, Macomb and other counties for 15 years and is available to provide you with a free consultation to personally discuss your specific situation and needs.

For more questions or information, please call us at (248) 290-0515 or visit us at



10.0James W. Chryssikos