This post was most recently updated on May 18th, 2023
When a couple decides to get a divorce, one of the most critical decisions they have to make involves the division of their business assets. This process can be complicated and contentious, especially if the couple has a large or complex business.
Scottsdale family law firm provides compassionate yet aggressive legal assistance while protecting their client’s legal rights. The firm’s team is also eager to educate you on various aspects touching on the family. To this end, they’ve prepared this mini-guide to help you understand the considerations to make when dealing with a difficult divorce.
In essence, to ensure the division of the business is fair and equitable, both parties need to agree on several factors, including:
- What constitutes an asset?
- How to determine the value of each asset.
- Who will receive which assets?
- What happens to outstanding debts or liabilities accrued by the business?
An asset represents anything of value that either party owns. This might include:
- The business
- Real estate associated with the business
- Business equipment and inventory
- Intellectual property, such as patents, copyrights, and trademarks
- Business accounts receivable
- Cash on hand
- Retirement accounts
The valuation process typically involves hiring an appraiser to take inventory of the business’s tangible and intangible assets. While the former is easy to value, the latter can be more difficult to place a dollar amount on.
Take the case of goodwill built up over the years, for instance. This intangible asset reflects the value of a business’s reputation and history. Still, your partner could be the face of the business, meaning their involvement is what customers are paying for. Hence, it’s often difficult to establish the monetary value of such assets or even argue that the business has much value without them.
Speaking of valuation, the appraiser and their team have to determine the business’ profitability. To do so, they examine the company’s financial records, including tax returns, bank statements, and invoices. Such information gives them a better idea of how much revenue the business generates, including its expenses. That said, if one party is trying to hide assets or inflate the value of the business, it could skew the valuation results.
Dividing Business Assets
The division process involves determining what each party will get. This may involve negotiation or mediation. However, the court may step in and make a decision if you can’t reach an agreement. The court looks at various factors when deciding how to divide the assets, such as:
- Each party’s financial needs
- The duration of the marriage
- Whether one spouse will have primary custody of the children
- The earning potential of each spouse
- The contribution of each spouse to the business
To this end, the court may offer various options when dividing the assets. These may include:
- Co-ownership – in this case, both parties would own the business jointly and share in its profits or losses.
- Awarding the business to one party – this option is usually only considered if the other spouse is disinterested in running the business or if it would be too difficult to divide the business equally.
- Buyout – under this arrangement, the spouse who wants to keep the business buys the other spouse’s share or interest. For a buyout to work, the buying spouse usually needs to secure financing. Or, they may have to sell liquid assets to generate the necessary funds.
- Selling the business – if neither party wants to continue running the business, they may opt to sell it and split the proceeds. However, this is usually a last resort as it means liquidating the firm’s assets.
Business Debts and Liabilities
In addition to dividing up the assets, you’ll also have to consider outstanding debts or liabilities associated with the business. Usually, this comprises:
- Business loans
- Taxes owed
- Supplier invoices
- Wages owed to employees
- Rent or mortgage payments
Typically, the person intending to keep running the business will be responsible for paying off debts or liabilities. Hence, the negotiations have to factor this into the equation. For instance, if one spouse is awarded the business, but the other is stuck with the debts, this could offset any benefit of owning the business.
Dividing a business in divorce can be a complex process. You have to consider multiple issues. Plus, the division isn’t always equitable. If you’re going through a divorce and own a business, it’s best to seek guidance from an experienced family law attorney. They can help you protect your interests and prevent potential pitfalls. Besides, state and marital property rules on division vary, so it pays to have someone on your side who knows the ins and outs of the process.