Splitting a Business in a Divorce Without Destroying It

Splitting a Business in a Divorce Without Destroying It

Going through a divorce is tough enough on it’s own. But when you own a business with your soon-to-be ex, it can get even messier. You’ve probably spent years building your business from the ground up. The thought of losing it – or having to share ownership with someone you’re divorcing – is a nightmare scenario.

Luckily, with some strategic planning and compromise, you may be able to split up a business in divorce without completely destroying it. This article will go over some tips and things to consider when dividing a business in divorce.

Get an Accurate Business Valuation

The first step is getting an accurate valuation of what your business is worth. This will impact how it gets divided up. You’ll probably need to hire a forensic accountant to analyze the company’s financial records and determine its fair market value.

Be sure to gather documentation on these factors that affect valuation:

• Business assets – equipment, intellectual property, real estate, etc.
• Business debts and liabilities
• Business income and profits
• Goodwill – intangible assets like brand identity and customer loyalty

The accountant will consider all these factors to come up with a valuation. This will determine how the business gets split up or if one spouse has to make an equalization payment to the other.

Look at Your State’s Divorce Laws

Make sure you understand the divorce laws in your state, as they pertain to dividing up businesses. Some key questions:

• Is your state a community property or equitable distribution state? This impacts how assets get divided.
• What happens if the business was started before marriage? It may be considered separate property.
• How will business assets vs. passive income be treated?
• Can a business be excluded from division with a prenuptial agreement?

Knowing your state laws will help you understand your options and negotiate the best settlement.

Consider Tax Implications

Taxes are often overlooked when splitting up a business in divorce. Here are some key tax issues to consider:

• Transferring part ownership to a spouse may trigger capital gains taxes.
• The spouse keeping the business may face higher income taxes.
• Alimony payments may be tax deductible for the payer and taxable income for the recipient.
• You may lose certain tax benefits that married couples enjoy.

Consult with both a divorce lawyer and accountant to minimize taxes related to dividing your business.

Decide Who Will Keep the Business

You’ll need to decide if one spouse will keep operating the business or if you’ll both retain ownership. There are pros and cons to each approach.

If one spouse takes over the business:

• They can have full control and won’t need the other spouse’s input.
• The other spouse can be bought out via a lump sum payment or installment payments over time.
• There’s a clean financial break between spouses.

If both spouses retain ownership:

• The business continues operating with minimal disruption.
• Both spouses share in future business profits and growth.
• It avoids major payouts to buy out the other’s interest.
• Spouses must continue working together despite personal differences.

Look at both options objectively to see which makes the most sense for your situation.

Create a Post-Divorce Management Plan

If you decide to co-own the business after divorce, you need a management plan spelling out each spouse’s rights and responsibilities. It should cover:

• Who handles day-to-day operations and management decisions?
• How are major business decisions approved?
• How are profits distributed to owners?
• What is the process if one spouse wants to sell their share later?
• How are disputes settled if owners disagree?

Having this plan in writing prevents future conflicts and confusion. It also protects the business if disputes arise later.

Consider Mediation or Collaborative Divorce

A traditional litigated divorce involving lawyers and court battles can be damaging for a business. The adversarial process worsens tensions between spouses.

Alternatives like mediation or collaborative divorce aim to settle divorce in a more amicable way. Mediators and collaborative attorneys help facilitate agreements out of court. The process focuses on compromise and avoiding “winner-take-all” outcomes.

Mediation

In mediation, a neutral third party helps guide conversations and negotiations between spouses. The mediator facilitates discussion but does not make any binding decisions. Mediation allows couples to work through issues and arrive at mutual agreements.

Benefits of mediation include:

• More control over outcomes compared to litigation.
• Usually less expensive than a contested divorce.
• Allows customized solutions focused on needs of both spouses.
• Preserves privacy since everything is handled out of court.

Mediation can be challenging if one spouse is unwilling to compromise or negotiate in good faith. There is also no guarantee you will resolve all issues. Any unsettled matters may still need court intervention.

Collaborative Divorce

In collaborative divorce, both spouses hire specially-trained collaborative attorneys. Everyone signs an agreement to negotiate in good faith and out of court. If either party litigates, the collaborative attorneys withdraw from the case.

Benefits of the collaborative process include:

• Incentive to reach settlement since litigation means starting over.
• Team approach with attorneys working jointly towards resolution.
• Confidential and private process.
• Ability to craft creative solutions not available in court.

The collaborative process also has challenges. It requires cooperation from both spouses and their attorneys. And if negotiations break down, you may need to hire new counsel and restart the divorce process.

Overall, alternatives like mediation and collaborative divorce can help avoid scorched-earth litigation when dividing up a business in divorce. The key is finding an approach tailored to your situation and that both spouses feel good about.

Other Tips

Here are a few other tips that can help make splitting a business in divorce smoother:

• Be transparent and share all relevant financial documents upfront.
• Consider tax-free transfers of certain business assets between spouses.
• Stagger payouts to buy out a spouse’s share over several years.
• Allow the spouse keeping the business to deduct buyout payments.
• Have a neutral business valuation expert both sides trust.

While challenging, dividing a business in divorce is possible without destroying it. Compromise and finding solutions that work for both spouses is key.