How Is a Business Divided in a Divorce?
There are many factors that will determine whether your spouse is entitled to a percentage of the business as part of the divorce settlement. The process of distributing marital property can be complicated, particularly when you own your own business, and you want to protect your investment, and the blood, sweat and tears that you have put into your business. An experienced divorce lawyer will determine whether your business is considered marital property and negotiate the best possible settlement that protects your business and other key financial investments.
Will My Business Be Considered Marital Property?
Different states have different divorce laws that will determine how property and financial investments are divided. For example, in community property states, all of the property that was gained over the course of the marriage is automatically divided equally between the two spouses. Other states – like New Jersey – practice equitable distribution, where the marital assets and debts are distributed fairly between the two spouses. When it comes to your business, the court will determine whether your spouse played a significant role in the ownership, development, and day-to-day operation of the business, or whether their role in maintaining the home and family contributed to the success of the business.
Depending on the circumstances, the court may award you the business, but grant your spouse other marital assets that are comparable to the value of the business. However, if your spouse played a significant role in the business, the court may split the business between the two of you.
What Factors Do Courts Consider When Dividing a Business?
There are a number of factors that the courts will consider when a couple is going through a divorce, and a business, and other marital property, must be divided, including the following:
- Whether you started the business before you were married
- Whether your spouse owns a percentage of the business
- How involved you spouse was in the day-to-day operation of the business
- The value that you and your spouse brought to the business, including establishing and building customer relationships and professional qualifications you and your spouse have
- Whether you or your spouse borrowed money from a family member to purchase something for the business
- Whether you or your spouse is in a position to buy the other one out
- How you and your spouse will divide the remaining assets and liabilities
- Whether you or your spouse will be able to earn a comparable income outside of the business
How Is the Value of a Business Determined?
The first step in figuring out how a business will be divided in a divorce is to determine the value of the business. There are three ways to do this, including the following:
- The asset approach: This uses the following formula to determine value:
Assets – Liabilities = Value
There are two types of assets, including tangible and intangible assets. Tangible assets include physical assets like inventory and infrastructure, whereas intangible assets include non-physical assets like patents, intellectual property, and accounts receivables.
While the formula may seem somewhat simple, there are some assets that are difficult to place value on, or the value can fluctuate. Other issues like problems with inventory or unrecorded assets can also complicate the process.
- The market approach: This determines the value of the business by comparing it to other similar types of businesses that have recently been sold. In many ways, this is similar to the method that realtors use to determine the value of a house. They look at how much other houses in the neighborhood have sold for and use those figures to recommend a sale price. However, it can be difficult to find a similar type of business that has recently sold to use a direct comparable.
- The income approach: This is the most commonly used method of determining the value of a business. Business information records and formulas are used to predict cash flows and profits as a means for placing value of a business. If you have a small business that has a simple business model, the process of placing a fair value on the business is fairly simple. However, when a large business is involved, it may be necessary to hire a Certified Business Appraiser who can help determine the value of the business.
What Are the Options for Dividing a Business in a Divorce?
During the divorce process, all assets and liabilities are divided through the equitable distribution process. While certain types of property are easier to distribute than others, others can be extremely complicated, including the division of a business. If you own your own business, there are three ways that a business may be distributed during a divorce, including:
- Buy out: This is the most common method, which involves one spouse buying out the other spouse’s interest in the business. In most cases, the buying spouse will transfer an agreed-upon lump sum to the selling spouse. However, if the buying spouse does not have enough cash to make a lump sum payment, the selling spouse may allow the buying spouse to make a series of payments until the total amount has been satisfied. The buying spouse may also cash in an IRA or 401K to access additional funds, although there may be tax implications for this.
- Co-Ownership: Another option is to continue to jointly own the business after the divorce has been finalized. This only works in amicable divorces where both spouses continue to trust and respect one another, despite the fact that their marriage did not work. Another example of co-ownership is if one spouse continues to run the business and makes payments to the other spouse as a way to satisfy his other share of the marital assets. However, this can be problematic if the business runs into financial difficulty and is no longer profitable.
- Sell the business: If the above two options are simply not feasible, the best way to move forward may be to sell the business and divide the proceeds. This will ensure that you and your spouse are fairly compensated, although it does present some potential difficulties. For example, if you and your spouse are unable to reach an agreement on the value of the business, the value of the business has decreased, or if you feel strongly about wanting to continue to own and operate the business, selling the business may not be an option.
What Can I Do to Protect My Business From a Divorce?
There are a number of proactive steps you can take to protect your business in the event that you and your spouse get divorced, including the following:
- Prenuptial agreement: This is the most common way to protect your business from the impact of a divorce. A prenuptial agreement is a binding contract that is executed before you get married, and is agreed to, and signed by you and your spouse. It should specify what will happen to the assets, property and income generated by the business in the event of a divorce, separation, or death.
- Postnuptial agreement: This is less common than a prenuptial agreement, but it is another option when it comes to protecting business interests. It is similar to a prenuptial agreement except that it is signed after you get married.
- Relinquish control of other marital assets: This is another way to protect your business. In exchange for retaining control of the business, or a significantly larger share than might otherwise be agreed upon, consider sacrificing interest in other marital assets like the family home, retirement accounts or other major financial assets.
- Place the business in a trust: If your business is placed in a trust, you technically no longer own the business, which means it cannot be counted as a marital asset.
- Structure the business as a partnership, LLC or by creating a shareholder or buy/sell agreement: These may include provisions that protect your interest in the business in the event that you and your spouse get a divorce.
Freehold Divorce Lawyers at Lyons & Associates, P.C. Protect Clients’ Business Interests During a Divorce
If you are going through a divorce, and you want to protect your business, it is in your best interest to contact the Freehold divorce lawyers at Lyons & Associates, P.C. We understand how important your business is to you, and that the business and all marital assets are divided fairly and equitably. To schedule a free, confidential consultation, call us today at 908-575-9777 or contact us online. Located in Freehold, Somerville, and Morristown, we serve clients throughout Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, and Morris Plains.