When divorce is on the horizon, most couples typically start making lists and inventories of their personal property or things like cars, lawn equipment, furniture, artwork, jewelry, and other items that fill their home. Dividing up property can be complicated enough, especially if the couple owns multiple homes or their property is spread across various places or states. But what happens when one or both spouses own interests in a privately held business, also? Suddenly the layers of complexity just increased significantly. Here are a few things to keep in mind if you find yourself in this situation, as well as our suggestions for how best to handle cases like these.

A Professional Valuation of the Business Should be Done

This process must be done by a professional, even if both parties have owned and worked in the business for many years and believe they know how much the business is worth. Only a professional who is experienced in producing business valuation reports for family court or other litigation cases should be hired to do this job. This professional will have the experience necessary to know which valuation method is appropriate given the circumstances of the business and the litigation.

Also, in cases where both spouses own interests in the same business, they will also be able to offer insight into which spouse might be the better spouse to keep and maintain the business. This is especially important in cases where the family relies heavily on the income of the business to support their lifestyle. Once the evaluator produces his or her valuation report, both parties will have an idea of how much the business is worth and will have a starting point for negotiations.

Determine Who Will Keep the Business Post-Divorce

Once you have a valuation both parties agree on, you and your spouse will need to come to an agreement on who will get the business or how it will be divided up, and how business operations will be maintained if both parties will remain involved post-divorce. If you can't agree, the court will make the decision for you at trial.

The court will look at several factors when making this decision, such as how dependent each spouse is on the income they derive from the business; how long each spouse has been involved in the business; each spouse's contribution to the current value of the business; and which spouse stands a better chance at maintaining the business post-divorce.

Just like most choices during divorce, any time the parties can come to agreements between themselves, even using attorneys to assist with the negotiations, they are more likely to be “okay” with the end result than going to court and allowing a judge who knows very little about you or your family make such momentous decisions that will dictate how your life, and in this scenario, your business move forward.

How to Buy Out the Other Spouse

If one spouse is going to keep the business and there's no proof presented that the business is non-marital property (i.e., that would not be subject to division during the divorce), they will need to buy out the other spouse's interest if the other spouse will not remain involved in the business post-divorce. This is where the valuation becomes vitally important, and everyone must agree on the valuation number.

Here's how this plays out using real numbers:  If the business is worth one million dollars according to the valuation, and there's been evidence to show that the spouses each own fifty percent of the business, then the spouse who will keep the business must “buy out” the other spouse's half (worth $500,000) to equitably resolve the property division portion of the divorce. This can be done by paying cash directly to the spouse, giving the spouse an equal amount of other assets (such as the marital home, if it is also worth one million dollars), or even by agreeing to a cash buy-out that is structured over time and enforceable with the powers of contempt of court like other post-divorce orders in family court.

Finalize Business Paperwork to Reflect Divorce Agreements or Orders

Once everything is finalized, it's important to have all the paperwork in order so that there are no problems down the road. Your divorce order alone won't necessarily be all the paperwork necessary to tie up all the loose business ends. This may include things like drawing up new shareholders' agreements, employee contracts, or other documents that might be needed to be changed now that the business is owned by only one person. If the business is one where there is a substantial amount of income that has not yet been realized but that the former spouse may be owed, the parties may need to also consult with a business attorney to draft policies or contracts for how and when those payments will be made to the former spouse if payment is received post-divorce.

Final Thoughts

Dividing up business interests in a divorce can be complicated, but by hiring the right professionals to help identify the business assets, each spouse's contributions to the business, and the proper valuation of the business, both parties will be able to make educated decisions about their financial negotiations that are based in fact. This is the only way to make sure that everything is fair and square for both parties, making it more likely the family court judge will approve a negotiated agreement presented by the parties. With careful planning and some professional help, you can make sure that your divorce settlement takes everyone's interests into account – including your most important business interests!

If you and your spouse are considering divorce, don't make any decisions about how to proceed before talking with a trusted attorney in your area. Your divorce and any settlement you create will be subject to your state's divorce laws. Without discussing your situation with an attorney, your agreement may not be what you want or what is beneficial to your future.  If you're in South Carolina, it's important to contact an experienced family court attorney like J. Benjamin Stevens today to discuss your specific situation.  Even if you aren't in South Carolina, Mr. Stevens is happy to offer referrals to a well-qualified attorney located in your state.

Ben Stevens has provided exceptional legal counsel and support to families throughout South Carolina for over twenty-five years, handling all matters of family law, such as prenuptial agreements, divorce, separation, alimony, and child custody. Our firm is well-equipped to handle all divorce and family law matters, no matter your circumstances. Contact our office at (864) 598-9172 or SCFamilyLaw.com to schedule an initial consultation.

Source: What to Consider When Divorcing Parties Have Interests in Privately Held Businesses by Sean R. Saari, CPA, ABV, CVA, MBA

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