Dividing the Assets: Different Types of Businesses
This is the latest in my series of articles examining how the marital interests in the ownership of a business enterprise can be monetized in the division of assets in a divorce. Prior articles have largely focused on successful operating companies selling products and services, which may be the most valuable marital asset to be divided. However, many divorces involve other types of substantial commercial activities presenting specialized challenges for family law attorneys and their clients. These situations must be carefully examined to determine the best approach for effectively determining the value of such assets, and then structuring an arrangement that best realizes and fairly divides that value. Here are some common situations requiring different approaches:
Early Stage Businesses. A particular challenge is presented by businesses that are in an early stage of development, before their products and services have sufficiently reached the market to demonstrate significant revenues. The company’s financial statements at this stage are unlikely to provide a basis for any meaningful assessment of value. In fact, an early stage company looking for venture capital financing, or responding to a larger company seeking a strategic acquisition, would take a very different approach in arguing for a strong valuation. For example, the business owner might focus on recent valuations of comparable businesses in the same industry, or emphasize the competitive edge its new product will have in reaching a lucrative market. An expert in the valuation of early stage businesses can be critical in reaching a fair resolution on these businesses. This is particularly true for tech companies or other businesses based on intellectual property models, where specialized valuation skills may be required.
Licensing Businesses. Some businesses generate their revenues solely or primarily from the licensing of their trademarks, copyrights or technology. For example, a widely-recognized trademark may be licensed to distributors of a wide variety of merchandise, or a software application may be licensed to many businesses or online platforms. The royalties from such licensing programs can be very lucrative for years into the future. In many cases, it will not be feasible to split the licensed assets between the two divorcing spouses because they are part of a naturally-integrated portfolio requiring ongoing development and management. However, if the assets are completely mature and require no further development or active management, continuing to hold them jointly and splitting the revenues may be feasible. Or, if the licensing activities have generated a consistent level of income over a number of years, it may be relatively easy for a qualified expert to determine the present value of that income stream, leading to a financial settlement in which one spouse’s interest is bought by the other. However, as with early stage businesses, special consideration must be given to technology, trademarks or other assets that are in development or have recently been launched, since their value will not yet be fully represented in the historical revenues.
Portfolios of Assets. Considerable value may reside in portfolios of assets being held for investment and eventual sale at an appreciated value. For example, minority investments in real estate ventures, stock portfolios which you can learn more about at Stocktrades, or collections of art, wine or other collectibles may embody substantial present or future worth. If these are presently saleable and market conditions are attractive, they might be sold with the proceeds divided in the divorce judgment. However, often this is not feasible. For instance, minority interests in real estate ventures or investment funds may not be transferable, or present market conditions may yield far less in a sell-off of the assets than could be gained by holding and selling at a later date. In some cases, the assets may be equitably divided, based on fair valuations, between the divorcing spouses. However, where that is not practicable, a better solution may be to place the various investments and/or assets into a jointly owned and controlled limited liability company so they can later be sold when they become transferable or have achieved greater value, to the benefit of both spouses. In short, different types of businesses and investments require careful analysis in considering what approach is best suited to determine the fair value and disposition of these important assets. A valuation expert knowledgeable in the particular type of business and assets, coupled with experienced transactional counsel, can help the family law attorney and client reach a favorable result.
Ken Luer is a partner in the Business & Corporate Law Department of Ervin Cohen & Jessup LLP. His expertise includes mergers & acquisitions, equity and debt financings, business law, and I/P and technology licensing, with a sub-specialty advising family law attorneys on monetizing valuable companies in marital property divisions.