Dividing a Business During a Divorce
Going through a divorce is stressful. You must set up new living arrangements, decide child custody, and divide assets and debt. If one or both partners own a business, that’s one more element to manage.
Dividing a business can be confusing and tedious. After all, a house is easy to appraise and then sell. Presumably, you or your partner want to keep the business going even after the divorce. We recommend you seek out a lawyer’s expertise; he or she can advise you based on your situation. However, here are some starter points to consider.
Who Owns the Business?
If Partner A bought the business before marriage or used his/her own money separately to invest in, purchase, or start the company, it’s considered separate property. However, if Partner A bought the business or started it during the marriage and/or used joint money, the business is considered marital property.
Further, even if Partner A used his/her own money to start the business, Partner B may have contributed financially at a later date or added labor, again making it marital property. Or, Partner A might have used money shared by both spouses to improve the business, again meaning Partner B has some interest. Again, it’s best to work with an attorney to first determine whether the company may be considered a marital asset.
Valuation of the Business
Assuming the business is a marital asset, the next step is to get a valuation. While an attorney may do this in some cases, he or she will likely try to value it higher or lower based on his/her client’s desires. For example, if Susan owns a business, her lawyer might argue it’s not worth as much so that her ex-spouse John doesn’t get as much payout. You might seek the services of an Accredited Senior Appraiser (ASA) or a Certified Business Appraiser (CBA) to obtain a fair valuation.
How to Divide a Business
Once the value is determined, three methods are most common among couples when splitting a business.
- Buy Out – A buy out is the most common method used in distributing a business. One party will buy the other’s stake in the company. Note that one partner doesn’t necessarily have to buy out the other with cash on the spot; using 401k or IRA is also permitted.
- Co-ownership – Depending on the terms you ended on before your divorce, Co-ownership may be a possibility. For example, one spouse may agree to physically work and run the business, while the other spouse agrees to make the required payments. Although this is a less popular option, this approach can work for some couples.
- Sell – This is likely the easiest option of the three, but not always the most desired. If you are experiencing a messy divorce and you are searching for the easiest way to cut all ties with your partner, selling the business may be your best best. This is a common way to distribute many different forms of properties in a divorce. If your business is not very profitable, it may take a significantly longer amount of time to find someone willing to buy the company. Of course, this option works best if both partners are willing to let go of the business and agree on a selling price.
There are various pros and cons associated with all three methods that you and your spouse should consider before making a final discussion. For more answers about various topics of your divorce, check out our blog. You can also register for our next workshop to ask a lawyer, a financial adviser, and a therapist directly.