If you are going through a divorce, and either you or your spouse own a business or you co-own a business together, there are several important considerations to make before you even think about having your attorney draft a settlement agreement. You will only wind up shortchanging yourself if you rush through the asset division process to settle, or fail to take the time to have the business assessed and valued.
Selling a Business before Divorce
If there is a company that’s a marital asset, like other marital property, it will be subject to equitable distribution. While some couples decide to sell the company and divide the profits, in most cases, one spouse (the one more involved in the enterprise) will maintain ownership and buy the other spouse out.
If you and your spouse agree to sell the company, it’s best to do it prior to divorce; it’ll be one less thing to worry about or fight over. Whether you want to sell the company or take the buyout route, a crucial first step is to obtain an accurate and fair valuation the business. You can enlist the help of an accountant, consultant, or business appraiser to value your business prior to a divorce.
Keep in mind that the spouse who wants to keep business will try to minimize its value to reduce the buyout amount. And conversely, the spouse who doesn’t want the company will argue for a higher estimate of the business equity. It’s not uncommon for each party to obtain their professional valuations to the negotiation table and try to arrive at a compromise.
Creative Solutions for Buyouts
Most couples with small businesses decide to go the buyout route. Problems usually arise when there is a shortage of liquid assets. The spouse who retains the business will compensate the other for his or her fair share of it. For example, if the business interest is worth $50,000 and the husband wants to buy the wife out, what does he do if he doesn’t have $25,000 in liquid assets? There are several creative ways couples can handle this. For example:
- He can cash in some of his retirement to pay her.
- She can downsize or sell a portion of the company.
- They can arrange for an exchange, e.g., he forfeits his share of the marital home in exchange for her share in the enterprise.
- They can set up a payment plan in which he makes payments to her until she’s paid off, e.g. he pays her $1,000/month for 25 months.
Whatever type of arrangement you choose, it’s imperative to ensure you got every last considerable detail in writing and signed by the court. If you are in the midst of the divorce and need legal counsel, you are welcome to call the Law Offices of Molly B. Kenny in Washington at 425-460-0550 for a consultation or fill out our online contact form.