If you are a business owner and in the process of a divorce, you could wonder how your divorce will impact your business.
The effect of a divorce on a business largely depends on how you handle your divorce. But either way, the impact of a divorce will be relatively significant.
When the family business is the only financial resource for the family, the dissolution of the marriage can have far-reaching consequences. But there is more than one approach to deciding the fate of a family business after a divorce.
Understanding Marital Estate
First, it’s important to consider whether the family business is part of the marital estate. The marital estate is the sum of the assets and debts a couple acquires during the course of the marriage. The course of marriage refers to when the couple became legally married and the date of legal separation.
It is common for the marital estate to be equitably divided between the divorcing parties. But some states only require that the estate be divided fairly while considering factors such as each party’s contribution to the marriage, financial needs, and other financial resources.
If a business is acquired after marriage, it becomes part of marital estate by default. If one spouse started a business before the marriage, it might fall outside the marital estate category. But a spouse could claim partial ownership of a business if it increased in value during their marriage, used family resources to fund the company, or worked at the business and built relationships with customers.
Business Valuation
“Some spouses create prenuptial or postnuptial agreements to address what happens to a business after the dissolution of a marriage. When done properly, these agreements are admissible in a divorce case and generally followed by the court,” says probate and family attorney Samah T. Abukhodeir.
Irrespective of whether a business falls under the marital or separate property category, it’s important to establish the value of a business and all other assets. Establishing the value of assets helps give the parties a clear picture of the worth of their marital estate and the financial resources of each party because they will have a bearing on the subdivision of resources during the divorce.
There are three methods for calculating the value of a business. The first option is calculating all the assets and subtracting all the liabilities. While this is the simplest method, it does not consider a business value based on projected growth. The second option is estimating the value of a business based on the market value. For example, comparing the sales price of similar businesses. This is a good approach, especially if the divorcing couple hopes to sell the business. The third option is the capitalization of earnings which accounts for present and projected earnings. (1)
Business Ownership after Divorce
There are several ways of addressing ownership of a business after a divorce. If one partner is more involved in running the business, they can opt to buy out the other. In most cases, the spouse who’s bought out takes other marital assets of a similar value to their share in the business or has the spouse that takes sole ownership make ongoing payments to the other spouse.
They can also choose to sell the business and split the earnings or run the business as a partnership after the divorce. Whatever option you choose, you must ensure you have a clear understanding of the terms, so it’s best to have a lawyer with you throughout the process.
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