Most business owners don’t head into marriage thinking about doomsday scenarios, but when divorce is imminent, your business may be at significant risk.
Depending on the nature of the business, each business will face its own set of problems and complications. However, there are generally three methods of dealing with a business during divorce.
With co-ownership, both spouses continue to own the business after the divorce. If spouses remain amicable, it may be possible to work together after a break-up.
Sell the business and divide the profits
The pro of this option is that both spouses may profit from a sale of the business. Plus, unlike co-ownership, spouses can avoid financial ties to their ex-spouse. However, many businesses can’t be sold easily and it may be months before a buyer is found.
Buyout the other spouse’s interest
In a buyout, one spouse keeps the business and buys the other spouse’s interest. A buyout may be the best option, assuming there are sufficient assets to complete the transaction. This can be accomplished if the buying spouse has enough cash or liquid assets available to pay off the selling spouse. Alternatively, the spouses could offset the selling spouse’s portion of the business with other assets, like a 401(k) or equity in the former family residence.
Value of the business
Whether you decide to sell the business and divide the profits or buyout the other spouse’s interest, you will need to determine the value of the business and how much each spouse owns. Generally, a business started during the marriage with joint funds is community property and is owned equally by both spouses. A business created before marriage, or founded with separate property funds (money earned before the marriage or by gift or inheritance), is a separate property business and is owned by one spouse. It is noteworthy that even if a business is started prior to the marriage or with separate property funds, the business usually does have community components that must be valued. Valuing a business is a complex task and can be done by an attorney, a forensic accountant, an appraiser or a combination of these professionals.
Avoid the problem
There are a range of protective measures business owners can take prior to marriage to avoid the problem during a divorce. An attorney can help with preparing any one the following: preparation of a will; a prenuptial agreement; a buy/sell agreement that stipulates what happens to company ownership in the event of certain triggering events; and creation of a domestic asset protection trust, which transfers the shares of a business into a trust that would not be subject to division in a divorce.