Three Key Factors to Consider when Evaluating Your Business to Sell, Split, or Co-Own
Valuing and dividing business interests is a common and challenging issue in a divorce. This can happen in the context of stock options for an executive, partnership interests in a professional association, or dividing stock in a family-owned or other closely held business. When it comes to owning a business with your spouse and deciding to divorce, it can be like you have to go through two divorces. This is especially true when (like a house or kids) both parties want it. A good first step is valuing the business. This can give some perspective and help the decision-making process in determining who will be awarded the business or whether it should be sold. Then, there is the decision of whether and how to buy out the other spouse’s interest.
1. Hire a Neutral Financial Expert
Determining the value of a business can be a complex and potentially an expensive undertaking. If you and your spouse do not agree upon the value of a business it is necessary to hire an expert to have a business appraisal conducted. In most cases the parties start with a neutral expert. If someone does not agree with the value determined, that person may choose to hire their own expert to either critique the report or even conduct a full business valuation.
The fair market value is what a willing buyer would pay to buy the business interest from a willing seller. If the family owns the entire interest in the business, that is the value of the business. If the family owns part of the business certain discounts are typically applied related to minority ownership and lack of marketability. If there are limitations on selling the business interest, further discounts can be applied.
2. Determine whether the business is a marital or nonmarital asset
A nonmarital asset is something obtained before the marriage, received as a gift or inheritance, or part of a personal injury settlement. It is not unusual for a business interest to have a nonmarital component.
The party making the claim that a business is nonmarital has the burden of proving that claim. To add to the complexity, a nonmarital asset can become a marital asset over time as marital work is put into sustaining or building that asset.
3. Deciding Who Wants to Own It
Do you want to buy out, sell, or co-own the business interest? Do ethics rules or business organizational documents allow a former spouse to have an interest in the business? There are even some businesses that have a “poison-pill” arrangement in the event of a divorce. A careful review of the business’s organizational documents is essential.
Most often one spouse is awarded that business and the other spouse receives comparable assets to offset the value of the business in the form of cash, cars, real estate, retirement accounts, etc. Another option is for one spouse to buy out the other over time by signing a note and paying off the debt with interest according to some pre-determined schedule. The stock (or other assets) can serve as collateral, and there can be tax benefits to this approach.
Another way to distribute a business asset is to continue to jointly own it after the divorce. It can be challenging, but this approach may make sense in certain circumstances.
When it comes to your business interests, there are many options and each case must be considered on its own merits. The risks and rewards of each approach must be considered. The limitations imposed by ethics rules, professional requirements, and by the business itself will play a role.