My Spouse Owns a Business. How Is It Valued in Our Divorce?

Divorce can be complicated enough when it involves dividing homes, savings, or investments. But when one spouse owns a business, the process becomes significantly more challenging. A business is not just another asset; it is often a source of income, identity, and future opportunity. Determining whether that business is considered marital property, and if so, how much it is worth, can have a major impact on the overall financial outcome of a divorce.

If you are facing divorce and your spouse owns a business, working with an experienced Manhattan divorce lawyer is essential. The valuation of a business in divorce requires not only a deep understanding of New York’s equitable distribution laws but also the ability to work with financial experts and present clear evidence to the court. The Law Office of Richard Roman Shum, Esq. provides skilled and strategic representation in these matters. To discuss your situation and protect your financial interests, call (646) 259-3416 today for a confidential consultation.

The Threshold Question: Is the Business Considered Marital Property?

Before a court can place a dollar figure on a business, it must first answer a foundational legal question: Is the business considered marital property? In New York, property division during a divorce is not a simple matter of splitting everything in half. Instead, the process begins with a classification analysis, an essential legal determination that separates assets belonging to the marital partnership from those that remain the individual property of each spouse.

This distinction forms the bedrock of every equitable distribution case, including those involving privately owned businesses.

New York’s Equitable Distribution Law

Under New York’s Equitable Distribution Law (Domestic Relations Law § 236), the division of property is guided by principles of fairness, not mathematical equality. The law recognizes that a marriage is an economic partnership and seeks to unwind that partnership in a way that is just and equitable, taking into account the contributions and needs of both parties.

Judges consider a comprehensive list of statutory factors before deciding how to divide marital assets, including:

• The income and property of each spouse at the time of marriage and at the time of divorce
• The length of the marriage, and the age and health of both parties
• The future financial circumstances of each spouse
• Any existing or anticipated spousal support (maintenance) orders
• The contributions, both financial and non-financial, of the non-titled spouse, including homemaking and childcare
• The liquidity or non-liquidity of assets (how easily they can be converted to cash)
• The tax implications of any proposed distribution
• The practicality and desirability of maintaining certain assets, such as a business, intact and under the control of one spouse

This framework ensures that the court’s decision is not merely an accounting exercise but a holistic evaluation of the marriage as an economic and personal partnership.

Classifying the Business: Marital vs. Separate Property

The classification of a business depends primarily on when and how it was acquired. Under New York law:

Marital Property includes all assets obtained by either spouse between the date of marriage and the commencement of a divorce action. This holds true regardless of whose name appears on the title. Therefore, if a business was founded, purchased, or expanded during the marriage, it is presumed to be marital property.

Separate Property, by contrast, belongs exclusively to one spouse and is generally not subject to division. This includes:

• Assets owned prior to marriage
• Inheritances or gifts received individually
• Compensation for personal injuries
• Property specifically designated as separate under a valid prenuptial or postnuptial agreement

A business owned before marriage begins as separate property. However, that classification can shift during the marriage, especially if the company grows in value or becomes intertwined with marital finances.

Appreciation of a Pre-Marital Business

Even when a business starts as separate property, its increase in value (appreciation) during the marriage may become marital property, but only if that appreciation resulted from the active efforts of either spouse.

New York law distinguishes between:

• Active Appreciation (Marital Property): When the business’s growth stems from the efforts of either spouse, such as managing operations, acquiring clients, or providing support at home, that allows the owner to focus on the business.
• Passive Appreciation (Separate Property): When the business’s value increases solely due to external market forces or inflation, without any contribution from either spouse.

This distinction often becomes the focal point of high-stakes litigation. The non-owner spouse’s attorney will work to establish a causal link between the marital efforts, both direct and indirect, and the business’s increased value, transforming that growth into a divisible marital asset.

How Separate Property Can Become Marital

Even if a business is originally separate property, its status can change through commingling, or the blending of separate and marital assets. Once funds or interests are mixed beyond clear separation, the law may presume the owner intended to convert the property into marital property.

Common examples of commingling include:

• Depositing business income into joint accounts used for family expenses
• Using marital funds to pay business debts or invest in its growth
• Adding a spouse’s name to ownership documents, stock certificates, or deeds

Depositing separate funds into a joint account creates a presumption of a gift to the marriage. The titled spouse must rebut this presumption with clear and convincing evidence and must trace the separate source of the funds. While New York does not apply automatic transmutation, failure to maintain detailed records or clear boundaries often results in the property being deemed marital.

Manhattan Divorce Lawyer Richard Roman Shum

How Experts Determine a Business’s True Worth

Once a business, or its appreciation, is classified as marital property, the next phase is to determine its monetary value. This process is neither simple nor subjective. It is a rigorous, evidence-based analysis conducted by financial experts who apply recognized valuation methodologies to arrive at a defensible figure. The resulting valuation will significantly influence not only the division of property but also the calculation of spousal and child support.

Choosing the Valuation Date

A business’s value can change dramatically over time, which makes the selection of the valuation date both critical and often disputed. In New York, the law provides general guidance but also allows flexibility to ensure fairness.

The default rule for “active” assets, such as a business that derives its value from a spouse’s personal efforts, is that the valuation date is the date the divorce action was officially filed, also known as the date of commencement. The reasoning behind this rule is that the economic partnership of the marriage effectively ends on that date. Any increase in the business’s value resulting from the owner-spouse’s efforts after this point is considered that spouse’s separate property.

However, courts have discretion to choose a different date, such as the date of trial, if doing so would produce a more equitable outcome. A compelling reason for this adjustment might arise if significant events occur between the commencement date and the trial that drastically change the business’s value. For example, if a company was thriving when the divorce began but later experienced severe disruption due to a natural disaster or pandemic, using the trial date may more accurately reflect its true worth and prevent an unfair distribution based on outdated information.

The Indispensable Role of Forensic Accountants

Valuing a business in divorce is a highly technical task that extends beyond the expertise of attorneys, judges, or the spouses themselves. This responsibility falls to forensic accountants or Certified Public Accountants (CPAs) who hold specialized credentials in business valuation, such as Accredited in Business Valuation (ABV).

These professionals act as financial investigators. They conduct a comprehensive review of the business’s financial records, including tax returns, profit and loss statements, balance sheets, general ledgers, and bank statements from several years. Their objective is to uncover the company’s true financial condition, earning capacity, and overall economic value.

In a divorce case, valuation experts may be engaged in one of two ways:

• Joint Engagement: The spouses agree to hire a single neutral expert whose findings are shared by both parties. This approach can reduce costs and conflict.
• Independent Engagement: Each spouse hires their own expert, resulting in two separate reports. When the experts’ conclusions differ, the judge must weigh the evidence and determine which valuation is more credible.

The “Normalization” Adjustment

A central part of the valuation process involves a financial adjustment known as normalization. This step is especially important for privately owned businesses, which often report financials designed to minimize tax liability rather than reflect the enterprise’s full profitability. Personal expenses are frequently run through the business as deductions, artificially lowering reported income.

Normalization corrects for these distortions. The expert carefully examines all expenses and identifies those that are personal or unrelated to normal business operations. These items are then added back to the company’s income to produce a normalized earnings figure that better represents the business’s true economic performance. This figure forms the foundation for valuation calculations and often results in a significantly higher business value.

This process can create tension for the business-owning spouse. The same financial practices used to reduce taxes may now increase the company’s appraised value, leading to a larger equitable distribution share for the other spouse.

Common examples of expenses that are added back during normalization include:

• Excess Compensation: Salaries paid to the owner or family members that exceed market rates for their roles.
• Personal Vehicle Expenses: Lease payments, insurance, fuel, and maintenance for vehicles used for personal rather than business purposes.
• Personal Travel and Entertainment: Family trips or meals recorded as business expenses.
• Discretionary Personal Expenses: Costs such as personal cell phones, club memberships, or home utilities run through the business.
• Non-Recurring Events: One-time transactions, such as asset sales or settlements, that do not reflect ongoing performance.
• Related-Party Transactions: Below-market rent or similar arrangements between the business and other entities owned by the spouse.

This detailed adjustment process ensures that the valuation reflects the company’s actual earning potential rather than its tax-adjusted income. In doing so, it provides a clearer and fairer picture of the business’s true worth for the purposes of equitable distribution.

Valuing What You Cannot See: Goodwill and Professional Credentials

Some of the most valuable components of a business are not visible on a balance sheet. These intangible assets, particularly business goodwill and professional credentials, often hold substantial worth and can become the most disputed elements in a high-asset divorce. New York law has developed specific and, in some ways, unique rules for how these abstract forms of value are treated during equitable distribution.

Business Goodwill in a New York Divorce

Goodwill refers to the intangible value that allows a business to earn more than would be expected from its physical assets alone. It can arise from a strong reputation, loyal customer base, brand recognition, favorable location, or unique operational systems. In divorce cases, properly identifying and classifying goodwill is essential to determining how much of it belongs to the marital estate.

There are two primary types of goodwill that must be distinguished:

• Enterprise Goodwill: This form of goodwill is inherent to the business itself and is transferable. It would remain with the business even if the owner-spouse left. Examples include an established brand, an advantageous location, proprietary technology, or a skilled workforce. If enterprise goodwill is developed during the marriage, it is treated as marital property subject to division.
• Personal Goodwill: This represents the portion of a business’s value that is directly tied to the personal reputation, skill, or relationships of the individual owner. It is a value that would disappear if the owner were to leave. For example, patients may seek a particular surgeon for their personal expertise, or clients may follow a consultant because of their reputation and personal trust.

In many states, personal goodwill is considered separate property because it is viewed as inseparable from the individual’s future earning capacity. New York recognizes enterprise goodwill,  the value that stays with the business itself, as marital property if developed during the marriage.

Courts are more cautious with personal goodwill, which depends on the owner’s individual reputation or relationships. While some cases (such as Moll v. Moll, involving a stockbroker’s book of business) have treated personal goodwill as marital, the 2016 statutory amendment to Domestic Relations Law § 236(B)(5)(d) now limits the valuation of purely personal or future earning capacity. Courts focus on transferable goodwill that has independent, marketable value apart from the individual.

This interpretation is particularly significant for solo practitioners, licensed professionals, and small business owners whose income and success depend heavily on their personal relationships and expertise. It often results in a larger portion of the business’s total value being subject to equitable distribution.

Professional Licenses and Degrees

New York’s approach to valuing professional licenses and degrees has evolved dramatically in recent years. The change reflects a move away from speculative predictions about future income and toward recognizing the concrete contributions made during the marriage to help one spouse achieve professional success.

The Old Law (for divorces filed before 2016)

For decades, New York stood alone in treating professional licenses and degrees, such as a medical license, law degree, or MBA, obtained during the marriage as marital property. Courts allowed experts to assign a monetary value to the enhanced earning capacity that the credential was expected to generate, and that value was divided between the spouses.

This practice drew considerable criticism because it required experts to project an individual’s entire future career and lifetime earnings. These estimates were often speculative and led to inconsistent or unrealistic valuations.

The New Law (for divorces filed in 2016 and after)

Effective January 23, 2016, New York amended its Domestic Relations Law to eliminate the direct valuation and division of professional licenses and degrees. This change codified the rule that enhanced earning capacity,  from a degree, professional license, or even celebrity status, is not a separate marital asset. Instead, the court may consider the other spouse’s support and sacrifices in helping the titled spouse obtain the credential when dividing other assets.”Under the current law, a spouse’s enhanced earning capacity from a license or degree is no longer considered a separate divisible asset.

However, this does not mean that the other spouse’s contributions are ignored. The statute now requires courts to consider the direct and indirect contributions of the non-titled spouse to the acquisition of the license or degree when dividing the remaining marital property.

Potential Outcomes for a Business in a Divorce

Once the court determines the marital share of a business’s value, the next step is deciding how the non-owner spouse will receive their equitable portion. There is no single formula that fits every case. The court considers the financial circumstances of both spouses, the nature of the business, and the practicality of maintaining or transferring ownership. In most cases, the goal is to compensate the non-owner spouse fairly without disrupting the continued operation of the business.

Buyout (Distributive Award)

A buyout is the most common and preferred solution in New York divorce cases involving a privately owned business. In this scenario, the owner-spouse retains full ownership and control of the company and compensates the non-owner spouse for their share of the business’s value.

If the owner-spouse has sufficient liquidity or access to financing, they may pay the non-owner spouse in a lump sum. When a lump sum is not feasible, the court may order a distributive award, which allows payment to be made in structured installments over time. This approach protects the continuity of the business while ensuring that the non-owner spouse receives their fair share.

Asset Offset

An asset offset is another practical and frequently used option. Instead of transferring cash, the court awards the non-owner spouse other marital assets that are equal in value to their share of the business.

For example, if the non-owner spouse’s share of the business is valued at $500,000, they might receive the marital home with equivalent equity or an equivalent amount from investment or retirement accounts. This method simplifies the process and avoids the need for a sale or ongoing financial connection between the spouses.

Sale and Division of Proceeds

In cases where neither a buyout nor an asset offset is financially feasible, the court may order the sale of the business. The net proceeds from the sale are then divided equitably between the spouses.

This outcome is typically viewed as a last resort, as forced sales can disrupt operations, damage goodwill, and may not yield the highest possible value. Courts generally avoid ordering a sale unless there is no reasonable way for one spouse to buy out the other or offset the value through other assets.

Co-Ownership

Co-ownership after divorce is exceedingly rare but not impossible. In some cases, former spouses may agree to continue operating the business together, particularly if they both play vital roles in its success and can maintain a professional working relationship.

This arrangement requires a high level of trust, clear communication, and a carefully drafted shareholder or operating agreement that defines each party’s roles, responsibilities, and future buyout terms. While feasible for a small number of amicable couples, co-ownership is generally discouraged because of the emotional and practical challenges that arise after divorce.

Outcome	Advantages	Challenges
Buyout (Distributive Award)	Owner keeps full control of the business; non-owner spouse is fairly compensated; payments can be made in installments if needed.	Requires sufficient liquidity or financing; valuation disputes may arise; structured payments can prolong financial ties.
Asset Offset	Avoids disrupting the business; non-owner spouse receives other assets of equal value; simplifies the process.	Finding assets of equivalent value can be difficult; may create imbalance in asset distribution.
Sale and Division of Proceeds	Provides a clean division through cash proceeds; both parties receive their equitable share.	Forced sale may reduce business value; disrupts operations; can create tax and timing issues.
Co-Ownership	Maintains business continuity if both spouses cooperate; feasible when both play key roles.	Rarely successful after divorce; requires high trust and clear agreements; potential for conflict and management issues.

Protecting Your Financial Future

Divorces involving a business require careful analysis, expert valuation, and skilled legal strategy. The way your spouse’s business is classified and valued can shape your financial stability for years to come. Having the right legal guidance ensures that your contributions are recognized and that you receive a fair share of the marital estate.

The Law Office of Richard Roman Shum, Esq. understands the financial and emotional stakes in these cases and is dedicated to helping clients manage each stage of the process with clarity and confidence. If your spouse owns a business and you are going through a divorce, do not face this challenge alone. Call (646) 259-3416 today to schedule a confidential consultation with an experienced Manhattan divorce lawyer and take the first step toward protecting your financial future.