Divorce and the Family Business: How a Small Company Is Valued in New York

A married couple has run a restaurant together for fifteen years. In the divorce, the mortgage balance is easy to find, the retirement accounts have statements and the bank balances are clear. The one number nobody can agree on is what the restaurant is worth, and that restaurant is often the family’s single largest asset.

Is the business marital property?

New York divides marital property by equitable distribution, and equitable does not necessarily mean equal. A business started during the marriage is generally marital property, no matter whose name it is in. A business owned before the marriage is separate property, but under Price v. Price (1986), growth in its value during the marriage that results from the owner’s efforts can be marital property if the other spouse contributed directly or indirectly, including by caring for the home and children. In a small business, growth is almost always “active,” which surprises many owners who assumed a pre-marriage business was off the table.

The valuation date: a choice that can be worth six figures

The court may value the business on any date between the start of the case and trial. Businesses that depend on the owner’s personal efforts are generally valued closer to the filing date, and passive assets closer to trial. If the business doubles or collapses while the case is pending, the choice of date changes everything. When to file is itself part of the strategy.

How value is determined, and where the fights are

Valuation experts weigh income, market and asset approaches. The most contested issue is usually goodwill. Goodwill that belongs to the business itself (its location, brand, customers and staff) can be divided, while goodwill tied to one person’s reputation and skill is treated differently. Since 2016, professional licenses and the earning capacity they bring are no longer marital property in New York, which makes separating “business value” from “personal ability” even more important.

The hardest part: money outside the books

Cash-heavy businesses such as restaurants, nail salons and laundromats often show a gap between reported and actual income. That creates a dilemma. Claiming years of underreported income is effectively admitting possible tax fraud in a court filing, while insisting the tax returns are accurate can affect how support is calculated. Courts are not powerless: a judge can impute income based on lifestyle and other evidence. How to investigate, present and weigh this issue calls for careful judgment.

There is also a technical but high-stakes issue: “double counting,” where the same income stream is used both to value the business and to calculate spousal maintenance (Grunfeld v. Grunfeld, 2000).

Once there is a number, how is it paid?

Courts rarely force the sale of an operating small business. More often the business goes to the spouse who runs it, who pays the other spouse their share, whether as a lump sum, through installment notes, by offsetting other assets such as the house, or through payments tied to future performance. Compare after-tax value, not face value. A house and a business interest with the same market value can produce very different amounts once taxes are paid.

Attorney’s perspective: how I approach these cases

When a divorce involves a business, I begin thinking about valuation at the first meeting, not when discovery starts. The first thing I look at is whether the financial records have been preserved, because the spouse who does not run the business is often locked out of its systems as soon as divorce is raised.

Second, I evaluate whether the spouses can jointly retain a neutral valuation expert. Competing experts can cost six figures, paid out of the couple’s shared assets, while a neutral expert combined with mediation often leaves more for both sides. Third, I build taxes into every settlement comparison so that my client sees the amount they will actually keep.

Talk to me

If your divorce involves a business that you run together, or that one spouse runs, please contact me before filing or signing anything. Call +1 718-218-5805 or schedule a consultation. We can meet in English or Chinese.

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

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