Successfully Dividing Business Assets in a Divorce

 Divorcing is hard enough, but it can be even harder when the couple owns a lot of shares in private businesses together. They have to figure out how much the businesses are worth, how much one spouse will pay the other spouse for their share, and how they will pay it. This post will give some ideas for spouses to help them find a fair value for their private businesses and split them up without spending too much time and money on their divorce. But they must be willing to think creatively and work together to make this happen.

 

How to Plan for a Business Divorce

 

To plan for a business divorce, the spouses need to get a lot of information about the businesses they own and share. Before they can agree on how to divide their shares, they need to know who owns the businesses, what rules apply to them, how well the businesses are doing financially, and what other money they have in their marriage. In this stage, the spouses should pay attention to these things:

 

1.     Did anyone value the businesses before, either inside or outside the business, and did anyone try to buy the businesses from the owners recently?

 

2.     Do any agreements or rules say how to value the business?

 

3.     How many partners are in the business, and do they have to approve any transfers of shares between the spouses?

 

4.     Do the spouses have enough money in their marriage to pay for one spouse’s share of the business right away, or do they have to agree on a payment plan?

 

5.     How much debt does the business have, i.e., can the business borrow enough money to pay for one spouse’s share of the business?

 

How to Find Out How Much One Spouse’s Share of the Business Is Worth

 

In a divorce, the spouse’s share of a private company may be worth a lot of money. So, it may be hard for them to agree on how much one spouse should pay the other spouse for their share of the business. It may seem easy to find out how much a business is worth, but many factors can affect its value. Also, the spouses want different things: the spouse selling their share wants a high price, and the spouse buying their share wants a low price.

 

The spouses probably want to avoid a long and expensive fight over how much the business is worth, which will need them to hire different experts and take a lot of time to settle. If the spouses want to reach a quick, fair, and objective deal on the business value, they may want to think about these options:

 

Hire a Joint Valuation Expert – The spouses could hire one business valuation expert they trust and agree to follow whatever this expert says about the business value and the price to be paid. They could also ask the valuation expert to look at the business’s financial performance for the last three years to find its value, i.e., they could try to base the business value on a three-year average.

 

Hire Valuation Experts Separately – Each spouse could hire their own expert to write a valuation report. If the values from the two experts are more than 10% different, they could agree that these two experts would then choose a third expert and follow whatever the third expert says about the business value. Or, they could agree that after the third expert writes their valuation report, the business value will be based on the average value of all three reports or an average of the two reports that are closest in value. This way, the couple lets the third expert decide the business value and agrees to accept that decision.

 

Some Other Ideas to Think About

 

Besides the ways we discussed before to determine how much the business (or businesses) is worth in divorce, some other options are more creative but less usual. The spouses may want to think about these options, but they must be okay with different settlement structures. These options are explained below.

 

Business Value Decided by Trusted Advisor(s) – Instead of hiring the business valuation expert themselves, the couple could hire one trusted advisor or pick a group of three advisors and ask them to find out how much the business is worth. This one advisor or group of advisors could also decide how the payment for transferring the spousal interest will be made. So, the couple would let someone they trust or a group of people they trust hire the valuation expert, check the value, and set the payment terms.

 

Wait Until Business is Sold – Instead of one spouse giving their share of the business to the other spouse when they get divorced, the couple could agree to keep their shares in the business after they get divorced. But they would have to agree that they will sell the business in the next five years and share the money they get from the sale. In this situation, the couple must discuss how they will split the money from the sale. Usually, when one spouse gives their share of the business to the other spouse when they get divorced, they agree, or the court says that they have to split the value of the business 50-50. But if the couple keeps their shares in the business after they get divorced, they may agree on a different split, considering how much the business goes up or down in value when they sell it years later. Also, when the couple still owns the business together after their divorce, they will have to make sure everything is clear and fair, like giving the spouse who does not run the business regular financial reports. They also need to limit what the spouse who runs the business can do to protect the other spouse's rights. For example, while they are waiting to sell the business, the spouse who runs the business cannot pay themselves a lot of extra money or let new people own part of the business, which would make the other spouse’s share smaller.

 

Have the Option to Sell Later – Another option, like the one before, is where both spouses keep owning the business after divorce. But in this option, each spouse gets a chance to sell their share in the future, maybe in three or five years. The spouse who runs the business would have a “call option,” meaning they can buy the share of the other spouse who does not run the business when they want to. The spouse who does not run the business would have a “put option” that would let them make the spouse who runs the business buy their share. The business would have to be valued when either spouse uses their option, but they could agree on a specific way to value it when that happens. And, like the option before, the couple will have to make sure that everything is clear and fair about how the business is doing and limit what the spouse who runs the business can do to protect the other spouse while they wait.

 

Summary

 

Divorces can be hard and more complicated when the couple owns a lot of money in private businesses together. Finding out how much the business is worth and how to pay for one spouse’s share can be challenging because it matters a lot for both. But, fighting over how much the business is worth can take a long time and cost a lot of money, which is bad for both them and the business. If the couple can think of new ways to value the business, though, there are options that can help them split their shares in private businesses in a fair and reasonable way for both of them.