Though divorce has many implications, both emotional and practical, one of its key considerations is the equitable division of assets. Oftentimes, determining how to divide the family’s assets in a manner that satisfies both parties lengthens the divorce process, especially when one of the assets is a family-owned business.
Splitting the family business in a divorce can introduce a new set of challenges to an already complex process. Ultimately, each party must decide their intentions for their ongoing involvement in the business, as well as the best way to divide the business financially.
The first step is determining the business’s worth by getting a formal appraisal from an unbiased third party. Once a value has been established, couples who are in the divorce process typically have three options for dividing the business.
One Spouse Keeps the Business
This option is most common among divorced couples. Typically, the spouse who runs the business buys out the other spouse’s interest based on the appraised value. This method is usually tax-efficient, since the direct purchase of shares is considered a transfer of property incident to divorce, which isn’t a taxable event in most circumstances.
In cases where the acquiring spouse doesn’t have enough liquid assets to purchase the interest outright, the divorced couple can structure a settlement note to be paid off over time. Alternatively, if each spouse owns shares in the company, the company can buy back the departing spouse’s shares. While this approach can have its advantages, it’s important to structure the sale carefully to avoid prohibitive capital gains taxes.
Both Spouses Keep the Business
While this approach may be straightforward from a financial standpoint, it’s not for everyone. In some cases where both spouses have emotional ties to the business, they can find a way for both parties to remain involved and work together amicably. However, many couples find it difficult to remain business partners following a divorce, which makes this option less common.
Both Spouses Sell the Business
A third option is for the couple to sell the business and split the proceeds. This approach allows both spouses to pursue independent interests, whether that entails starting a new business or retiring on their earnings from the sale.
One of the drawbacks of this approach is that selling a business can take time and doing so can significantly lengthen the divorce process. In the meantime, both spouses must find a way to work together or decide if one party will remain involved until the business is sold.
When it comes to dividing the family business in a divorce, no single approach is right for everyone. While some divorced couples may have no trouble continuing their working relationship, others find it easier to leave the business behind altogether and make a fresh start. Working with a lawyer and a trusted team of advisors can help you determine the solution that makes the most sense for your financial and emotional well-being.
This article was featured on Forbes, view it here.