Divorces are inherently complex, and where a jointly owned business is involved, things can get even more complicated and messy. We asked a panel of experts to share their thoughts on how to equitably divide business responsibilities and assets in the wake of a divorce. Here’s what they had to say.
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Hire a business valuation expert
There are so many ways to divide a business in a divorce. The most common way is to hire a business valuation expert to approximate the value of the business. The spouse that wants to keep the business then pays off the other spouse in a lump sum or payments based on that valuation and their marital portion.
But, business valuation is not an exact science. If the parties don’t agree on the value of the business or its marital portion, the parties will have to present two business valuation experts to provide competing testimony as to what they believe the marital portion of the business is worth. This is extremely expensive.
Half of a business is a lot of money. Most businesses can’t raise that kind of capital for a payoff to one spouse in a divorce. So, alternative arrangements can be reached. One spouse may be made a silent partner in the business who will simply receive dividends on an ongoing basis with an option to sell their portion of the business to the other spouse at a later date and at a price determined by a predetermined formula.
Literally, any arrangement is feasible if the two spouses own the business in its entirety. Some spouses may even continue to work in the business together post-divorce.
Split or share
In reference to a jointly held business, you have to work backward and think about how things will wind up down the line. Business and broken hearts don’t mix.
Almost always, it’s going to be better to:
1. buy the other [partner] out and/or split the divisions of the business so it avoids overlap or
2. bring in new management and have a revenue share for one of the spouses. Only in the rare situation where the parties can work seamlessly together does it work in the long run.
Tisha Tyler, MBA
Buy out or run the business together
Unfortunately, marriages don’t always make it. In the case of divorce, one way to divide a couple’s business and its assets is to take into consideration each partner’s role in the creation and day-to-day running of the business. If they can work together, then they should try to do so. If not, then the partner with the most money or time invested should try to buy out the other partner.
Depends on the type of business
The business division depends on the type of business (sole proprietor, partnership, corporation) which defines the owners. In addition to that, one needs to know who actually does the work.
If the business is a sole proprietorship, you can’t split the business or even turn it over to the spouse without creating a new company. If it is a partnership between the two spouses, then it can stay a partnership or be transferred to one spouse. This means it will have to be a new company (sole proprietor) unless it is an LLC. If it is a corporation (taxed as S-corp or C-corp), then the shares can be transferred to the other spouse in any amount without changing the company.
How to divide it financially also depends on many factors. If one spouse is doing all the work and decision making, then it should probably stay with that spouse and just a portion of the profit would be provided to the other spouse as alimony. Changing ownership is likely to cause business issues (disruptions, loss of income, etc.). Dividing a business also implies that the business will be broken up. This could be good (like when GM separated out GMAC — the financial arm — from GM — the car manufacturer) or bad (how do you break up a UPS franchise into two).
Beth Logan, EA
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