Business ownership presents complex problems when dividing marital property
In any Colorado divorce, a spouse’s ownership or partnership interest in a business is considered marital property. So, just as the judge must decide how to divide the value of a house purchased during the marriage, so must the judge also decide how to divide the value of the business. Unfortunately, Colorado law does not provide a bright line rule as to how a judge is either to assess the value of the business or to assess the percentage to which each spouse is entitled. Because of the many various ways a divorce judge can apportion business ownership between spouses, it is common to hire a an expert to conduct a business evaluation to provide the judge some guidance on the matter.
Colorado law, while not providing an exact formula on dividing such property, does provide some guidelines for the judge in reaching a decision. They are as follows:
How much did either spouse invest in the business? This is the key question in determining the percentage each spouse may be entitled to once the overall value of the business has been determined. Whether the investment is financial or it involves putting a lot of time and work into growing the business will be taken into consideration when dividing that business in a divorce. This includes a spouse’s contribution to the marriage as a homemaker.
Did the business increase in value during the marriage? If a business began during the marriage, the amount that business has appreciated in value over the marriage – if any – is essential for the judge to figuring out whether there are shared interests in the business (i.e., the business should be considered a marital asset) or not (i.e., the business should remain a person’s asset and, therefore, won’t be divided in the divorce proceedings).
On what date did the business begin? Whether the business started before or during the marriage is important for the judge to decide how to divide the business, primarily as to how the value of the business appreciated during the marriage.
How much is the business worth? A popular method is the excess earnings method, which attempts to determine the present value of the business that includes both tangible assets and intangible assets, such as business goodwill.
What liabilities does the business have? Not all businesses are profitable. Business debts and long-term obligations can lessen the business’s overall value.
Therefore, a flourishing business co-owned and operated by both spouses that began during the marriage will provide each spouse a greater and equal value than a business started near the end of the marriage built by only one spouse.
The case most often cited in divorce business divisions is In re Huff, 834 P.2d 244 (Colo. 1992). This case set the excess earnings method as the generally accepted method for dividing a business. It also clearly established that awarding a spouse a portion of the business does not preclude that spouse from also being awarding spousal maintenance. And it set as the standard for dividing a business interest that the division be fair and equitable, not simply a mathematical formula. The effect of this ruling is that a judge need not take into account any ownership or partnership agreement that sets out the value of someone leaving the business as the absolute business value.