How to split the business during a divorce
On behalf of
Drawing the right line in the sand is one of many challenges in a divorce settlement. Splitting a retirement fund or bank account is more straight-forward, but valuing and then distributing assets if you own a business or your own practice is an abstract process.
A business is shared property
Your name may be right there on the sign out front, but unless you had a prenup agreement before getting married, your business is a shared property as defined by the state of Colorado. During your divorce, the value of the business will be shared between you and your spouse.
Factors that determine how ownership is measured:
- The amount of time and role of the spouse in the business
- Increase (or decrease) of value during the time of your marriage
- Sacrifices made during the marriage. For example, if a spouse stayed home from work to raise children, or if she was the primary breadwinner during the company’s start-up phase.
Different methods to split the business shares
It truly depends on the business arrangement as well as your own household arrangement. Prenup agreements or business plans like a buy-sell agreement offer security but this post is for those who did not include those safety measures.
If the business is in your name, perhaps including others outside the marriage, your ownership stake is marital property shared between the two of you. When a couple end their marriage, it’s rare that they want to stay in business together.
Within your overall settlement, the goal is to divide your property without tearing the business apart. It’s rare to literally split a percentage of ownership. Instead, trading of assets is a common solution. Fair or equitable division of property is the goal, not a perfect 50-50 valuation. Perhaps you’ll keep the business while your spouse will, in turn, keep the house or car. Division of property is a negotiation with trades and sacrifices to reach an equitable middle ground.
A spouse can also sell you the shares, but it requires capital or credit to make the purchase. If you have business partners, an ex-spouse may sell interest to the other parties or equally among the group as an alternative to taking over operations.
Or, if feasible, both parties can stay on board as co-owners of the company.
The stability of your business or practice should be a careful consideration during settlement negotiations. Can you afford to buy out your spouse, or will selling your ex’s stake impact business operations and shift power to another business partner? If your business is extremely valuable, finding a new partner or absorbing the cost yourself can be a challenge that requires creative restructuring or financing.
These are real risks that take your divorce outside the home and into your professional life. A divorce is a complicated legal matter and it affects your future well after you’ve signed on the dotted line and moved to a new home.
When working out the details of your shared property, make sure you consider all scenarios and implications of your decisions instead of just pushing through to “get it over with.” For business owners, a divorce is more complicated and carries potential long-term changes to your business in addition to your home life.