When a business owner gets divorced, their business interests may become a subject of property division. Here’s what you should know about the process and how you can protect what you’ve worked so hard to build.
Are Business Ownership Interests Marital or Separate Property?
While a divorce proceeding divides marital property, spouses get to keep all their separate property. Typically, separate property includes all property acquired before marriage and certain other property, such as separate gifts or inheritances. Marital property includes all property acquired during the marriage. Thus, a business that starts during marriage becomes marital property. However, in cases where a spouse started their business before getting married, any business value growth that occurred during marriage may constitute marital property.
Business Valuation in Divorce
When spouses must divide business interests in divorce, conducting a business valuation can help a couple resolve legal disputes about how to divide those ownership interests. Usually, spouses will hire business valuation experts to provide a reasoned opinion on the business’s value and the value of the owner spouse’s share. Valuation experts use various methods for determining a business’s value, including:
- Book value approach : Calculates a business’s value by subtracting its total liabilities from the total book value of its assets.
- Market value approach : This approach determines a company’s value based on the prices in recent sales or financing rounds for similar companies.
- Income approach : Calculates the present value of a business’s future anticipated revenues or profits.
Common Methods of Dividing a Business in Divorce
Various legal complications can complicate dividing a business ownership interest in divorce. For example, a business’s governance documents may prohibit transfers of ownership interests without the approval of the other business owners/partners. As a result, spouses may pursue various options for dividing the value of a business or an ownership interest in a divorce, such as:
- Co-ownership : Couples may agree to co-own a business when they jointly owned it during marriage or after dividing an owner spouse’s ownership interest.
- Buy-out : When a divorcing couple co-owns a business, the spouse who wishes to continue operating the business may choose to buy out their ex.
- Selling the business : When one or both spouses own a business and cannot feasibly divide ownership interests or co-own the company, one option for dividing the business’s value involves selling the business to a competitor or strategic partner and dividing the sale proceeds.
- Offsetting assets : A spouse who owns business interests may choose to compensate their ex for their share of the business interest through cash or other marital assets of equivalent value.
Legal and Financial Consideration
Dividing a business in divorce comes with other legal and financial considerations. For example, financing a transfer or buy-out with the company’s cash or assets can significantly impact its financials. Dividing business interests can also trigger various tax implications. Finally, changing ownership due to an owner’s divorce can adversely affect a business’s operations.
Contact a Divorce Attorney Today
Are you concerned about how an impending divorce could affect your business? An experienced divorce attorney can help you understand your legal options and guide you through the property division process. Contact The Law Offices of Dawn K. Gull today for an initial case evaluation to learn more about what to expect when dividing a business in divorce.