Divorce is tough enough, but when a shared business is thrown into the mix, things can get very complicated, very quickly. If you are divorcing your spouse and the two of you own a business together, this blog post is for you.
Can a Divorced Couple Run a Business Together?
Of course, there is nothing that will legally prohibit a divorcing couple from continuing to work together in their business. The questions becomes: is your dynamic unique enough that you can handle it?
In most cases, the answer is a resounding “no.” Most people cannot handle continuing to work together during and after the emotional fallout that typically accompanies divorce. They say that it’s tough working with your spouse… try working with your former spouse! Most of the time, it’s a recipe for disaster.
However, some couples can do it. When couples come to me in this situation, claiming that they want to continue working the business together despite their divorce, I send them to a business lawyer who will help them modify their business agreement. This is important for the health of the business: it’s not a good idea for a divorced couple to attempt a 50/50 decision-making dynamic when they’re no longer completely aligned. At some point, they will inevitably end up in a stalemate, and that’s not good for business. It’s also not a bad idea to draft an agreement of what happens to the business if the parties subsequently decide that running the business together isn’t working. In that way, you’ll avoid a later dispute.
Divorce: Who Keeps the Business?
In most cases, the big question is: Who gets to keep the business?
Sometimes that’s not a difficult question, say, if the husband owned the business before the marriage and the wife wants out. But if the couple started the business together, built it up through the years as a team, and both have an equal emotional stake in the company, who gets to keep it? That’s a big question that a mediator can sometimes help to resolve if the couple isn’t able to make a decision on their own. In some rare cases, the business will need to be sold or liquidated.
Determining the Value of a Business in Divorce
If it is decided that only one person will remain involved in the business, the value of the business must be determined.
That’s important because, in divorces, we create a spreadsheet that lists every asset and every liability belonging to each party. The Court will want to split marital property equitably, but to do this without actually selling the business, a value must be established so it can be determined the value of the assets each side is getting and if there should be a payment to more equitably divide the marital estate.
Here’s an example of how an equalization payment works. For this example, we’ll use houses instead of businesses for simplicity:
- Say a divorcing couple has two assets: a primary house with a net value of $300k, and a rental house with a value of $200k. If they decide the wife will keep the primary house, it goes into the wife’s column — that’s $300k for her.
- Now, the husband has $200k in the rental property in his column. If they decide the marital estate should be divided equally, the wife will be required to pay $50k to the husband: now her column reflects $300k minus $50k, and his column reflects $200k plus $50k.
- In a non-community property state, the property doesn’t have to be divided equally. The statute lists factors to consider in determining an equitable division, e.g., contribution, separate property, etc.. If we find out that the husband put in $150k of separate property to buy the second property, the Court may decide that he is entitled to more than 50% of the assets. Every situation is a little different.
Determining the value of the business is where things get tricky (and where big fights often break out). Often, business valuators must be brought in… and that can get dicey.
In my next blog post, I’ll dive into how business valuators can add an extra layer of complication to the process. In the meantime, if you are getting ready to go through a divorce, let’s talk. Schedule a complimentary consultation with my office by calling 303-449-1873.