How Business Interests Are Divided in Colorado Divorce Cases

Sometimes the division of property in a Colorado divorce is relatively straightforward, but it can become much more complex if one or both partners owns a business or is a partner in a business. Dividing a business or partnership interest during a divorce may be a difficult valuation that falls within a trial judge’s discretion. The price stated in a buy-sell agreement is not conclusive. Partnership agreements are not conclusive either.

A Colorado judge must do more than look at a balance sheet of assets and liabilities. Rather, the court must consider the context of the agreement. It should also factor in assets, both tangible and intangible. This includes the value of the work in progress, goodwill, and accounts receivable.

If a business share is in a company not traded on the stock market, the value of an ownership interest can be hard to measure fairly. However, a “marketability discount “can adjust the value of shares downward. A marketability discount is an amount that is deducted from an equity interest to reflect the lack of a ready trading market for shares. The propriety of using a marketability discount was decided in a 2010 Colorado Supreme Court case.

In that case, the husband had started and owned shares in an oil and gas service company that was not publicly traded, but was valued at 2.5 million. Throughout the long-term marriage, the husband had worked in oil and gas, but his earnings increased substantially after he started his own business. He retained an expert who determined that his ownership interest was $1.625 million after he applied a 33% marketability discount. The husband claimed he had monthly expenses of $15,000.

The couple had a separation agreement, including a provision as to the valuation of the husband’s ownership interest in the oil and gas company that included a marketability discount. The wife claimed the agreement was unfair.

At a hearing, both parties presented experts on the value of the husband’s interest in the business. In the initial valuation, the experts were close to each other, but differed on the question of whether a marketability discount should be applied. The wife’s expert thought it
should not.

The trial court enforced the separation agreement. The court of appeals, however, found the separation agreement unconscionable. The wife urged the appellate court to follow a bright line rule against marketability discounts that had been adopted in an earlier case that dealt with the non-divorce context of minority or dissenting shareholders’ rights. The appellate court rejected the wife’s argument that the rule should be extended to the divorce context.

The Colorado Supreme Court reviewed the case to consider, among other things, the appellate court’s ruling on marketability discounts. It explained that trial courts have discretion to apply this type of discount when examining the ownership interest in a closely held corporation that is being divided in a divorce proceeding.

Distinguishing between the case cited by the wife, it reasoned that Colorado law asks family law courts to divide marital property in proportions that it “deems just after considering all relevant factors.” The Legislature didn’t use the term “fair value” in the statutory section on property division as the dissenting shareholder’s case cited by the wife did. Therefore, the Colorado Supreme Court ruled that the decision of whether to apply the marketability discount in evaluating the division of business interests in divorce is best left to a trial court’s discretion.

If you are planning to divorce, a knowledgeable Colorado family law attorney can help you figure out the best way to value your business and deal with other divorce issues. Contact the experienced Denver family law attorneys at Plog & Stein, P.C.

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