With the assistance of outside accountants and valuation experts, our attorneys work diligently to value a small business or farm using the recognized approaches to valuation. We also work to maximize the tax advantages to our clients and the marital estate. Our attorneys are familiar with and understand business-related terms and documentation that impact the value of a business, including buy-sell agreements. We are also prepared to deal with any role nonmarital property plays in your business.
Many times, business owners have a significant net worth, and it is important to hire attorneys who understand not only family law, but also business, tax, estate planning, and real estate law. A solid foundation in accounting, finance, and general business issues is also essential. Gislason & Hunter attorneys are familiar with these areas and are prepared to handle any issues that may arise during the division of a farm or family business.
Valuation of a Business
When a Minnesota divorce includes an ongoing business as an asset, there are many interesting and complex issues that need to be addressed. Valuing a business is an art, not a science, and there is no precise, perfect method of measuring a business’s value. That said, there are various components to a business that may impact value for purposes of divorce.
One important factor is whether or not to include “goodwill” and, if so, how much. In Minnesota, the goodwill value of a business is a transferable property right and is generally defined as the amount a willing buyer would pay for a going concern above the book value of the assets. In Minnesota, judges have a significant amount of discretion to both determine what constitutes goodwill and how to address it as part of the divorce process. Generally, goodwill consists of two separate components: “institutional goodwill,” which is marital property subject to a just and equitable division, and “personal goodwill,” which is not included in the divisible marital estate.
In a professional practice or a business where the business owner’s reputation or personal contributions to the business are a key factor in its value above and beyond the book value of the assets, a court is more likely to find that the “goodwill,” or a greater portion thereof, is personal in nature and not subject to division. However, if the goodwill lies more in the business as an ongoing institution and not in any individual employee or shareholder, the goodwill is more likely to be described as institutional in nature and thus subject to division and valuation as part of the divorce.
Cases involving businesses with significant goodwill are prime examples of cases where business valuation experts should be retained, preferably early on in the divorce process, to ascertain what, if any, goodwill exists in the business and whether that goodwill is personal or institutional. The characterization between those two different classifications can have a substantial impact on the value of the business and the division of marital assets.
Farm Ownership and Divorce
Farming is not just a business; it is a way of life. Historically, divorce rates for farmers and ranchers in the United States have been well below the average divorce rate for the total population. The reasons are many. Farm families are generally closer as a family unit than nonfarm families. Farm couples generally have similar values and cultural backgrounds, are more likely to be religious, and are typically in rural areas where divorce is less common and where “family values” are more cherished.
In the past, there were fewer opportunities to “stray” and fewer economic opportunities for farm wives. But now, the impact of the outside world, particularly for farm wives, is significant. More farm wives now work off the farm and have their own lives separate from the farm. Additional stresses, pressures, and problems in the farm marriage can occur when wives work off the farm. But wives working off the farm is not the only change occurring. The pace of farming is faster and more complex. Farm work is (still) difficult and time-consuming. But also, to a significant degree, the fact that the parties’ parents are living longer, and may still be involved in the family farm operation or, in some cases, retain the label of “patriarch” or “matriarch,” contributes to family strife and stress. And in recent years those of us who routinely help farm spouses through the difficult process of dissolving a marriage have seen a rapid increase in upward social mobility. Many, but certainly not all, farm divorces are initiated by the wife — not an atypical phenomenon for divorces in general. But a new phenomenon for farm families too is the increase in farm wives seeking divorce very close in time to the last child leaving home for work or college. Yes, “empty nest syndrome” seems to be hitting farm families particularly hard. Divorce is indeed impacting the family farm to a greater extent.
Nobody likes to talk about divorce, even though statistics still show that nearly half of all marriages end up going down that road. Farmers in joint ventures with their parents, siblings, or other business partners naturally have a higher probability of divorce impacting their farming operation. When any of your business partners’ marriages dissolve, you can be sure the event will impact your bottom line as well. For those reasons, and many more, marriage and family farm succession planning plays a vital role in determining whether or not divorce impacts your farm, and to what extent.
Prenuptial agreements are now common operating procedure for the next generation of farmers. When family farms are transferred from one generation to the next, it is vital to understand whether or not the family farm will be divisible in the event of a divorce. A simple error or failure to properly classify a gift or inheritance can have dire consequences down the road. Many agreements between the generations are done on a handshake, and there is no formal agreement concerning ownership of assets or division of income. Those realities make dissolving a farm marriage much more complex, difficult, and costly. When marriage and farm succession planning is done correctly, the likelihood of divorce decreases; when done incorrectly (or more likely, not at all) the likelihood of divorce significantly harming the farm operation skyrockets.
Farm divorces are extremely complex. Will he be able to cash flow the farming operations? What if prices of the farm output go down and he can’t afford to keep the operation afloat? Are there nonfarm assets that can be awarded to the nonfarming spouse to allow suitable income for him or her to live on without invading the farm or requiring spousal maintenance? These are just a few of the difficult questions that must be analyzed in connection with a Minnesota farm divorce.
Dividing marital property in a farm setting is highly fact-specific, and requires significant effort from the parties’ legal counsel and other trusted advisers. Including bankers and accountants in the conversation is highly advisable. When divorce occurs, the pie gets divided and neither party has the same level of financial security going forward as they had during the marriage. Even when farmers are doing well, a divorce can be financially and emotionally devastating. When divorce happens, care should be taken to lessen the negative impact of divorce on the family farm by negotiating cash payouts over time, rental agreements, and options to buy for land awarded to the nonfarming spouse, as well as accounting for likely and nonspeculative tax consequences related to the assets. Careful analysis and use of business valuation techniques and other legal methods are also important.
But that is not to say that it is advisable to take unrealistic or extreme positions if you are faced with a divorce. Going for the jugular is typically not advisable. The best course of action is usually to work quickly with competent professionals to determine the financial rights and obligations of the parties and avoid long, costly legal battles and the courtroom.