Divorce is undoubtedly a stressful task; however, it becomes exacerbated even more when dividing property and business assets during the termination of your marital relationship.
Unfortunately, what was once ‘Ours’ before divorce divides into ‘his’ and ‘hers’ after divorce. No matter how amicably both spouses agree to end their marital relationship, they somehow have to split their hard-earned business assets, which can be nerve-racking.
If one of your assets is a business, many questions can arise, such as how should it be divided, or should it be split or not?
Generally speaking, whenever a married couple applies for divorce, their assets, properties, and all liabilities are divided through a process known as Equitable Distribution. It is the court that classifies property either as marital or separate. Moreover, the court places value on the property and distributes it between the spouses.
If you are undergoing a divorce and are worried about how business assets are divided, fret not! In this article, we are going to discuss things that you must know.
Is the business a Marital Property?
Business assets are considered marital property under various state laws. There is a multitude of factors that determine whether a business is marital property or not.
Simply put, if you already owned a business before getting married, it will be considered your separate property. You can claim that business as your separate asset using a prenuptial or postnuptial agreement.
Besides, if you decide to set up your business in a trust, you can prevent your business from becoming marital property.
But even if you started the business before the marriage, it can lose its separate property status in the absence of a prenuptial or postnuptial agreement if your partner became a significant part of the business by contributing to its growth or becoming a partner.
Besides, if you established the business after getting married, it will be counted as your marital property.
All marital property is subject to division during a divorce.
Common Ways to Divide Business Assets in Divorce
When it comes to dividing business assets and interest in divorce, couples commonly use the following three strategies.
Sell the Business
In this method, both spouses decide to sell the business assets. After selling, They divide the cash fairly between them. It is considered one of the easiest ways to split a business asset. By selling a business, both spouses break up in all marital affairs.
Selling the business ensures that each spouse gets compensation for his/her interest in the business. However, you might experience some drawbacks in this method. For instance, it might take months to sell your business to a potential buyer, particularly when your business is not profitable. Besides, it might be difficult for you to find a buyer having the same level of passion for growing business as its owner.
Moreover, market fluctuations might impact the business’s value, and therefore, it may not provide you with great returns, specifically in times of economic downturn. Another downside of this method relates to the emotional attachment of one spouse with the business. If this is the case, one spouse will resist all attempts to it.
Another common way to divide the business in a divorce is to buy out your spouse. This vision method becomes even simpler if both spouses equally share business assets in which each spouse will have to pay 50% of the business assets.
Of note, the buy-out method mainly works for a spouse who already has enough money to buy out ownership of the business in one lump sum.
Furthermore, in some instances, spouses can agree to structure the acquisition of business assets over time. This structured buy-out usually happens when there is a large amount that is to be paid to satisfy the interest of the spouse.
Besides, courts can interpret this division of business assets in an entirely different manner as they take into account several factors that might materially impact business interests that each spouse will receive.
This method of dividing business assets requires no division at all. As the name suggests, co-ownership requires both spouses to continue owning business assets jointly even after the dissolution of marriage.
Spouses can adopt this method of co-ownership depending on how harmonious the situation is after getting a divorce. You can keep business arrangements intact and continue working at the business.
Alternatively, both spouses can keep their interest in the business asset with one spouse acting as an absentee owner who merely accepts payment for satisfying a share of the marital property.
Most notably, with this method, both spouses must maintain trust and respect between them to continue with this co-ownership.
How to Determine the Value of Business Assets?
Before dividing the business assets in the divorce process, spouses need to determine the business’s value.
Business valuation is a crucial component when it comes to the division of the business in a divorce. In this assessment, all assets, financial statements, and debentures are included. Generally, three approaches are used to calculate the value of business assets.
The formula for this approach is quite simple. In this valuation, all liabilities are deducted from business assets, and the resulting amount is referred to as the actual value of your business.
Of note, this approach can become complicated due to the depreciating value of assets, declining market value, unrecorded liabilities, and investments.
In this approach, business assets are compared with a similar business that has been sold recently. It resembles the method used by a realtor to determine the value of the property compared to other properties sold in the neighborhood. However, it may be difficult if no similar business can be found that has been sold lately.
The income approach requires the history of business information to evaluate the profits and cash flows to determine the business’s value. With this approach, future profits of business can be predicted based on relevant financial information and special formulas of business.
Spouses can also hire an expert like a certified business appraiser to determine the fair value of their business.
How Can You Protect Business Assets from Division in a Divorce?
Several other ways can help spouses to protect business assets before filing a divorce. Below are some of the measures that the business owner should take in advance.
- Prenuptial Agreement– it refers to the binding contract between spouses and is executed before marriage. This agreement defines what happens to property in case the spouses apply for divorce. It must include the disclosure of all properties and assets.
- Postnuptial Agreement– it is similar to a prenuptial agreement as it regulates the ownership of spouses’ interests except that it is signed after your marriage. Judges execute scrutiny of this agreement, and not all states recognize this agreement.
- Buy-Sell Agreements/Partnership– these agreements protect the business owners and their business interests in the event of divorce.
In brief, divorce can have devastating impacts on the division of business assets. If you are going through a divorce or have recently filed for divorce, you need to know whether your business assets are considered marital property.
Similarly, spouses must know the common ways that they can adapt to divide their business assets when getting a divorce. Furthermore, both spouses are advised to consider some agreements to protect their business assets while getting an uncontested divorce.
You can also hire an expert lawyer who can protect your business interests before the court during marriage dissolution.
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