Every divorce has its own challenges. Some of them are personal and emotional, like child custody and visitation, and other issues are more financial.
One of the most challenging of the financial issues in a divorce occurs when one or both of the spouses has ownership interests in a business. Whether sole ownership or some kind of partnership is involved, it can be extremely difficult to split a business interest in divorce.
The first major challenge is to determine the actual value of the business in question. With daily sales figures, payroll equipment, real property and other fluctuating assets and liabilities, determining a business’s value can be like aiming at a moving target.
Along with valuating a business, it is necessary to classify how much of the business interest is marital property and how much is individual. There is usually a mix between individual assets and marital assets that have been invested in a business, making it extremely difficult to classify business assets and debts.
Method of division
Once a business is classified and the value at the time of separation is determined, the next major challenge is to determine how to best split this asset between the divorcing parties. There are numerous methods for this division, including:
- Liquidation: For many couples, this is the best approach: simply liquidate the business and once all of the dust has settled, split the assets evenly. Of course, this approach will not work if the party who owns the business wants to keep it running.
- Joint ownership: When a business is lucrative, a couple could decide to just keep the business going and share ownership. However, this approach will work only if the couple has an amicable relationship at the time of the divorce. When the couple can’t get along and work well together, the day-to-day work of running a business can become impossible.
- Cash payout: When one spouse wants to keep the business running and the other spouse does not want to be involved in the operation, the owner-spouse can simply pay out the other spouse his or her share of the split.
- Hidden assets: One thing to watch for with particular diligence is the possibility of hidden assets. A spouse who is running his or her own business will have more opportunities than most to hide assets. There are endless nooks and crannies in a business where assets can be hidden well, including payroll, sales commissions, bonuses, investments, various bank accounts and equipment purchases.
These are just a few of the challenges involved with splitting a business ownership interest in a divorce.
If you are facing a divorce in which a business will be split – whether you are the owner or the other spouse – it is critical to work with an experienced lawyer who can protect your interests and make sure the business is separated equitably.