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How Owning A Business Is Affected During A Divorce

Let's Untie the Knot | How Your Business Gets Handled During A Divorce

If you are getting divorced and you own a business, dividing the marital property becomes more complicated.  Your business is probably one of the most valuable financial assets you own.  Additionally, if you are a business owner, you most likely have a significant emotional attachment to your business.  You’ve invested your blood, sweat and tears into nurturing and growing your business.  The following are 5 important considerations to keep in mind if you are a business owner headed for divorce:

Maintain impeccable records, purchase the business with your separate funds and keep the family’s finances separate from that of the business:

This may be the most important piece of advice you will get.  The rule of thumb in separate versus marital property is this:  if the business is acquired during the marriage, with joint funds, then it is considered marital property and the value should be shared equally by the spouses.  However, if the ownership interest in the business occurred prior to the marriage, or was acquired with separate funds, then it should be considered separate.  An attorney or accountant can review these crucial factors and help determine whether the business interest is marital or separate.  First, compare the date of the marriage and the date the business interest was acquired.  Second, determine the source of funds used to start the business.  Finally, assess the financial and labor-related contributions to the business given by either spouse during the marriage.

Valuing the business:

If the business is marital property, you need to determine how to value the business in order to divide it.  There are three basic ways to value a business:

  • Market Approach: The market-based approach looks at valuations for similar companies in the marketplace.
  • Asset Approach: The asset-based approach looks at the fair market value of the assets and liabilities of a company, including intangible assets (such as goodwill).
  • Income Approach: The income approach considers income generated by an entity’s assets over a certain period of time. This approach relies on the fundamental valuation principle that the value of a business is equal to the present worth of future benefits of ownership.

Decide how you are going to divide your business in a divorce:

If your business is marital property (most are), you are going to have to decide how you are going to divide it.  There are three options in terms of distributing a business interest:  (1) the buy-out; (2) co-ownership; and (3) sell the business.

  • Buy-out: The buy-out is the most common method used. In this scenario, one spouse essentially buys out the other spouse’s interest. For example, Jane and Joe are both doctors and they jointly own and run a medical practice. They agree that the value of the practice is $600,000. Jane plans to move to Washington and work for another medical practice and Joe plans to continue working for the couple’s practice. In order for Jane to get her half, Joe would have to pay Jane $300,000.
  • Co-ownership: Another way to distribute an asset is to jointly own it after your divorce. This is not a very popular way to distribute a business asset in divorce because many couples are not able to continue to have a productive working relationship after the dissolution of their marriage.
  • Sell the business: If the buy-out is not a viable method, the best way to make sure each spouse is compensated for his or her interest in a business is to sell the business and divide the proceeds. This can be problematic because market fluctuations can have a significant impact on the value of a business.

The impact of a business on spousal support:

Any business consists of two components:  an asset and an income.  An asset means that its worth something on the open market.  An income means that it generates revenue.  Its value in generating income is what comes into play with spousal support.  The significance in recognizing its value in generating income is that if you are the spouse with the business, you want to make sure the other party doesn’t “double dip.”  In other words, if you are paying your ex-spouse half of the value of the business as a property settlement, you don’t want to let them also receive income generated by the business.

A business is also a liability

If you are the spouse who is giving up his or her half of the business ownership in the divorce, you want to make sure that your former spouse is liable for all debt related to the business and will indemnify you and hold you harmless from all debts and any liability claims that might arise in the future.  This provision needs to be broad enough to include liabilities arising from tax returns that were done improperly.

When you are going through a divorce and business assets are at stake, dividing the marital property becomes more complicated.  It is always best to consult with both an accountant and an attorney to obtain an accurate business valuation and to know your legal rights when it comes to dividing the business. 

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Let’s Untie the Knot, LLC is not a law firm. It is a company providing informational products, DIY software, technology and legal document assistance. Nicole Schaefer is an attorney licensed in Oregon, but she does not provide any legal services. The independent attorneys hired through this site will have their own lawyer-client contracts and terms. Let’s Untie the Knot, LLC does not create an attorney/client relationship.

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