Written by Brett Trembly –
While millions of Americans deal with divorce every year, a small segment of people have a major additional consideration when terminating a marriage – business owners. Owning a business with your life partner can be great, until the dreaded divorce. While stocks, life insurance and real estate holdings can be moderately difficult yet manageable in divorce proceedings, businesses present much tougher challenges, and can be the source of thousands of dollars in added attorney’s fees and expert witness costs.
When you and your partner get divorced, it is imperative to know the various ways to divide the assets, so that the soon-to-be-exes can (hopefully) use that information to create a plan moving forward. Generally speaking, there are three common ways to figure out the dreaded question you might be asking about your future as a business owner, what now?
First, and probably the most common solution – or at least the one the courts tend to force if the parties can’t agree – is to attempt to divvy up the business based on percentage of ownership. This doesn’t take into consideration a prenuptial agreement, but based upon the length of marriage and if the business was a preexisting asset, but let’s say you agree that each partner is entitled to one-half (50 percent) of the business. The parties can create a new Operating Agreement, hopefully agree on terms, and then how to handle distributions moving forward. They key here is that is one party, let’s say the ex-wife, is going to continue to run the business, then she will receive an agreed upon salary for doing so. Then, the parties will share equally in any distributions. This doesn’t provide any immediate funds for the other party – the ex-husband in this instance – but at least he’s secure in the long-term gain of value. The Operating Agreement should also have provisions covering the sale of the company and other major decisions that protect the husband. It may also provide for a buyout over time, or many other options, but for the sake of this abridged article, it’s enough to know this option requires a lot of cooperation.
The second, and perhaps least common way to handle business assets in a divorce, is to continue to run the business together. It should be obvious why this is the least common method divorcing parties choose, but nevertheless, it does actually happen.
Finally, if the parties do not want to continue working together, and cannot fairly divide the business assets and value and create a plan moving forward captured in an Operating Agreement, the third main option is to perform a business valuation and then have one party buy the other party out. The valuation is the area where the parties most often cannot agree, and spend tens of thousands of dollars on experts and additional attorney’s fees. If the parties can agree – or if the court orders – a final value of the company, then the purchasing party can pay the selling party over time, via personal funding, by securing a traditional or SBA loan, or even by selling half of the business to a new investor or partner. Sometimes, however, the party wishing to keep the business cannot afford the buyout, and also cannot get a loan, so he or she is forced to sell the business for fair market value. This normally happens when the parties are out for blood, and the business is an innocent victim, for better or worse.
Regardless of which plan works best for you and your ex-spouse, make sure to hire a team of professionals that can help facilitate the process and hopefully make it more simple than it sounds. By having a trusted team that is working in your best interest, you can move forward with your life and take on your next venture with confidence. Good luck and just know that by identifying the options, you are at least taking a step in the right direction!