As heartbreaking as a divorce may be, we all know that the Equitable Distribution process will be the one giving us all the headaches, especially if a business is involved.
The court will classify your property as either marital or separate, although this can be changed in most cases with a pre-nuptial or post-nuptial agreement. It will then place a value on that property/business, ultimately dividing it between the spouses.
The distribution part can be the most complicated. For example, when you are filing for divorce, you know that your car will remain your car and that you will most likely sell the marital residence. What, though, happens to your business?
In order to answer this question, let’s see what you need to know when you are dividing a business in a divorce.
Deciding the Value
When it comes to a divorce, a business is valued in the same way as when you sell, buy or refinance it. The expert assigned to value your business will examine its financial records, as well as the following aspects:
- Cash Flow
- Customer Good Will
- Profit and Loss Statements (over a certain period of time)
- Assets – inventory, equipment, real property.
Naturally, the location and type of business will also be taken into account as will the economic trends and conditions which may affect its future profitability. When your business has been valued you will then have to decide what to do with it.
What can you do when dividing your Business in a Divorce?
Once you know the true value of your business, you and your spouse will have to decide what you want to do with it. In this respect, you have three choices and both of you must agree upon one of them, or at least concede in favor of the other.
- Buy Out
This choice basically refers to buying out the business from your spouse. For example, if you have a business worth one million dollars and your former partner does not want to own it (either entirely or in part) you will have to pay them half of your business’s value.
Keep in mind that the buyout can also be done with liquid assets or via a structured plan. Theoretically, you can use almost any means to pay your spouse the value required for you to be the sole owner of the business.
As the name implies, co-ownership means that the former couple will continue to jointly own their business. In short, the business side of their lives can continue as before even though they are divorced or separated.
There is also another version of co-ownership that implies one spouse receiving payments from the other, from any future business proceeds. This continues until their share of marital assets is satisfied, without them actually owning or running the business.
- Selling the Business
Obviously, selling the business is the easiest thing to do when you go through a divorce and don’t want to deal with the implications brought about by its division.
Even though this looks like an easy way out for some people, you have to bear in mind that your business can be valued at the wrong time and may actually increase in value a month or two after you sell it.
While selling is an easy and fast choice, it can also be disastrous, especially if you plan on using your share of the proceeds to start a new business.
The Bottom Line
Letting go of your business can be difficult, which is why most couples often prefer to buy out the business or co-own it if they still get along with each other.
The buy out choice is probably the most popular, mainly because neither of you actually risks anything. Selling the business can rush you into making a bad mistake and receiving less money. Co-ownership does not always work, as the two of you may no longer be able to work together in a productive manner.