This happens with couples who are married and operate a business together as partners.
A divorce settlement is complex in itself, with the distribution of assets being the most difficult aspect to handle. Essentially, the assets and liabilities they own together are split through Equitable Distribution.
The court classifies their property as either separate or marital, places a value on it, and then distributes it between the spouses.
But things are not as simple as they sound, particularly when it comes to the distribution of a business that you run together.
There are several questions involved in the decision- whether both partners have an equal ownership interest in the entity, how this interest would be split, what about the valuation of the common assets and liabilities of the company, and more.
Obviously, it wouldn’t be as easy as dividing your vehicles, jewelry, or even the house you own together. Still, there is a need to find a solution, which is possible only with consent and arbitration.
Here are the methods that divorce lawyers often recommend for the distribution of a common business during divorce settlement and proceedings.
1. Buying out
As the name suggests, one spouse simply buys out the interest of the other spouse with the buying out an alternative.
This is perhaps the simplest and most commonly recommended alternative in such complex divorce cases.
Consider a couple that runs a clinic together and one of the spouses plans to move to another state after the settlement. They determine the value of the practice as $600,000.
The spouse who intends to stay and continue the practice has to pay $300,000 to the one who wishes to migrate.
Buying out is also ideal if one partner has a greater interest and involvement in the joint business. It would be sensible for this partner to buy out the other’s share and continue the company.
Clearly, this option will work only if the buying spouse has sufficient cash to pay to the selling spouse.
While you will generally have to pay in a lump-sum, there is also an option to work out a structured buy-out plan through mutual agreement.
Another alternative in this context is to offer some assets to the selling spouse if you do not have enough cash to buy the business.
For example, you can give them complete ownership of your marital residence or some other asset of comparable value. Or you can liquidate your personal assets or pay as a combination of part cash and part asset.
The second alternative is to continue owning and running the business jointly even after the divorce.
This is possible if you have amicable relationships and intend to carry on as partners in the future.
Expert divorce lawyers at Higdon, Hardy & Zuflacht, LLP suggest that exploring this possibility makes sense only if you are willing to work as partners for a long haul and have a positive and sustainable relationship.
So both the partners need to have an open discussion to be extra sure about this decision.
Co-ownership has another version where one spouse will continue the company while the other will just get payments from the future proceeds.
The idea is to get their share of the marital assets without going through the complexities of buying out or selling the business.
This is, however, a risky proposition because the company may cease to turn a profit in the future.
Despite its simplicity, co-ownership is not a popular alternative because sustaining a productive working relationship with an ex-spouse after the dissolution of their marriage is quite unrealistic.
It only works in situations if both are on amicable terms and can continue trusting and respecting each other.
3. Selling the business
The third alternative for divorcing spouses to divide their business is by selling it out and dividing the proceeds.
This is also a common divorce settlement alternative because it completely closes the possibility of any future disputes.
Just as you may prefer to sell your marital home, divide the proceeds, and go your separate ways after the divorce, the same makes sense for a common business as well.
However, there may be some difficulties in specific situations if you opt for selling the company. For example, it may not be possible to find a buyer for immediate sale if the entity is not profitable.
It may also not be a good option if the partners do not agree over the valuation of the business.
Moreover, selling a business is not apt if one spouse is interested in continuing with it. You may not get a feasible value if the markets are fluctuating and you may not want to sell it for a loss.
It would make sense to either wait for the market conditions to improve before you proceed with the divorce settlement, otherwise, you will have to settle for a lower payout in such a situation.
Careful consideration of the situation is all the more important if you want to settle the distribution by selling because you would want things to work out in favor of both the parties.
Conclusion: Divorce settlement and asset distribution
The intention of all three methods of a divorce settlement is to ensure a fair distribution of the joint business.
Each method has upsides and downsides and you need to consider them carefully to decide the one that would work for you.
Typically, the business is often awarded to the spouse who has the greater involvement in running the operations and the other is compensated.
In rare cases, it makes sense to continue the company jointly. Finally, the court would order selling the business and dividing the proceeds to avoid any future disputes.
The best way to handle things is amicable because disputes often end up causing losses for both parties.
Ideally, you should seek advice from your divorce lawyer and consider closing the settlement as simply and quickly as possible so that both the partners can move on with their lives.
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