A business can be one of the most important and valuable assets to you or your spouse. Figuring out what will happen to a business can cause additional stress during a divorce. To relieve some of this anxiety, this blog post on dividing business assets during a divorce will explain the basics of splitting a business, your options, the challenges of making decisions about specific types of businesses, and ways to protect your business.
Overview
Most assets in a divorce are deemed either marital or separate property. After this, the marital property is split using a system called “equitable distribution.” This means that the assets and property are split according to fairness based on different factors. It gets more complicated when it comes to splitting a business. In Alabama, a business is not considered a marital property unless both parties have benefitted from the business.
Determining what kind of asset a business is depends on several factors. One factor that is considered is the timeframe in which the business was started. If the business began before the marriage or with separate financial aspects, then the business is considered a separate asset. If the business began after the marriage or was started with joint funds, then the business is considered a marital asset.
Financial aspects also play a role in the decision. If the business made notable gains during the marriage, these gains will likely be considered marital property. If a spouse made financial or labor contributions to the business, these will also affect the outcome.
If you or your spouse has a business, the first step you need to take is to get an accurate valuation of the business. This means that you need to get an accurate and detailed account of the business’ financial situation. Be aware that volatile markets and economic issues can greatly affect business value.
Another challenge that may arise during the valuation process are the concepts “personal goodwill” and “business goodwill.” Personal goodwill refers to the skills and work that is attributed to a certain individual. Business goodwill is a term that refers to the positive aspects of a business that draw in customers such as the atmosphere or where the business is located.
Your Options
One option is a buyout. In order to buy out, the buying party must have enough cash or liquid assets to buy out the selling party. This is typically done in a lump sum but can be paid out in payments over time.
Another option is to sell the business completely. When you decide to sell the business, you split the proceeds. This option presents a few challenges. One party may not want to sell and want to continue the business. It can also be hard to find a buyer for the business if the business does not have high gains. There can also be disagreements about the value of a business
If the divorce is amicable, you may be able continue joint ownership of the business. As long as there are no disagreements, this is possible. This is generally uncommon, but not out of the question.
Challenges With Specific Types of Businesses
With a sole proprietorship, the owner of the business may get their paychecks from business accounts and also use the money for personal expenses. These expenditures are added back into revenue by the court but it can be hard to find them all. All of the expenses included in the valuation of the business must be necessary to the business. With a sole proprietorship, you will usually need an accounting professional to assist with the valuation process.
If you or your spouse own a professional practice, the previously mentioned concepts of “personal goodwill” and “business goodwill” may come into play. A lot of times the private practice cannot be bought out or sold by the second party because they cannot practice at the business without a license.
If you and your spouse have a partnership, you have a few options. The business can be sold to one party or you can sell the business entirely. If you and your spouse have defined separate roles within the company you may be able to continue the partnership.
Protecting Your Business
A prenuptial agreement can be useful to those who already had a business before a marriage. A prenuptial agreement is a written agreement signed before a marriage that allows you to decide what specific assets will be considered marital or separate in the event of a divorce.
A buy-sell agreement is a good idea if you have a partnership with your spouse. These agreements essentially have the same aspects as a prenuptial agreement but pertain to a business.
There are many different challenging details when dividing business assets during a divorce. It’s important to know the details about your business and what options you have. The more you understand about how the law works, the better prepared you will be during the process.
