How Are Business Assets Divided in Divorce?
- How the value of a business is determined
- Solutions for splitting a business in divorce
- How to protect your business during and after divorce
Going through a divorce is a challenging and emotional time. That's all intensified when one or both spouses own a business. Not only is it another asset to negotiate and divide, but it can also add to the stress, especially if one spouse wants to keep operating the business.
How the value of a business is determined in a divorce
The value of a business can be determined during divorce proceedings by using one or more of the following methods: an income approach, market approach, cost approach, or marital asset-based approach.
The income approach is the most common way business property division is achieved. It’s based on the estimated future earnings of the business. To determine how much a business is worth, the market approach looks at comparable sales within similar industries. The cost approach looks at the actual cost to recreate the business minus depreciation for older assets. Finally, the asset-based approach looks at the net value of all assets in the business and subtracts liabilities from that total.
The reason why a business must be valued during a divorce is that it affects the division of assets between spouses. In order to fairly distribute marital property among spouses, a divorce decree must contain an accurate valuation of any businesses owned by both of them or even just one spouse.
To ensure an accurate business valuation, each spouse may have their lawyers hire professional evaluators, such as accountants and appraisers, to complete appraisals and valuations of the business and its assets.
Possible solutions for splitting a business in divorce
When splitting a business in a divorce, the options available depend on what agreement has been reached between the spouses. Some of the most common solutions involve becoming business partners, an equalization payment, and liquidation.
Becoming business partners
This option allows both spouses to remain involved in the business through co-ownership. Advantages include reducing potential conflict between divorcing spouses by maintaining some level of collaboration and mutual respect as well as continuing to earn income from the company together.
Disadvantages include potential financial disputes among business owners and difficulty managing assets owned jointly by two people who may have different visions for the company’s future growth.
In this scenario, one spouse buys out the other’s share of the business with a one-time payment. Advantages include allowing one spouse to retain their ownership interest in the company and maintain control over decisions regarding its future direction. This may be important to one spouse who put great effort into starting or growing the business and who wants to retain sole control.
Disadvantages include the fact that one spouse must give up their share of a potentially successful venture and the need to pay off any jointly owned debts associated with it.
This involves selling off all or part of the business with proceeds divided between spouses based on ownership percentages. Advantages include receiving immediate payment for the business and not having to worry about continued involvement with an ex-spouse.
Disadvantages include possibly receiving less than market value for the business because of an expedited sale process and no longer owning any part of it. For any spouse who wants to keep operating the business, this is the least attractive option.
How to protect your business in the face of a divorce
It’s important for both parties to take measures to protect their interests when splitting a business in a divorce case. Here are some essential tips to keep in mind.
- Document everything. Keeping track of all financial records, income sources, expenses, and other important information related to the business will help provide evidence in the event of an audit or dispute.
- Seek professional assistance. An experienced attorney can provide guidance and advice on how to properly divide the business while protecting both spouses’ interests as much as possible.
- Agree on valuation. Have an independent third party assess and determine the value of the business to make sure both spouses receive their fair share in any divorce settlement.
- Get creative. Explore options such as forming a partnership agreement or having one spouse “buy out” the other’s share of the company. This could allow for ongoing collaboration and mutual respect between ex-spouses.
- Develop an exit strategy. Before any final agreement has been reached, each ex-spouse should develop a plan for how they will manage their affairs going forward without relying on their former partner. This could involve setting up separate businesses or finding alternative sources of income.
- Create adequate safeguards. If a business agreement includes clauses dictating behavior from either spouse, make sure there are ways to enforce them (such as financial penalties). This will help safeguard against any untoward conduct from either side.
- Keep it civil. Try to remain focused on finding solutions that meet everyone's needs without resorting to threats or heated arguments. Working together with your ex can help resolve matters amicably and reduce potential stress during this tricky time.