How to Divide a Business During a Divorce

Buying Out the Business

If one of the spouses wants to continue the business, they would most commonly try to buy out the other’s part.

For instance, if a couple (let’s call them Samantha and George) jointly runs a cake shop, there’s a chance that one of them (Samantha) may decide they want to continue working there. In contrast, George is looking for a clean slate and wants to move to another state for a new job or business venture.

After evaluating the shop at $500,000, both spouses know that each has a $250,000 interest in the business. Therefore, if Samantha wants to continue it, she has to pay George half of the shop’s value. She would have to provide those $250,000 to essentially acquire his half.

Of course, this solution only works if the person who wants to buy the other one out has enough funds to cover the costs. If they have the money, they can simply transfer the lump sum to the other spouse’s account.

The spouses may opt for a structured buyout as well. In that case, the total amount would be split into a few payments that would be paid at specified times. For example, Samantha and George may agree on her paying him $150,000 this year and another $100,000 next year.

Samantha also has a few other options in case she doesn’t have enough cash right now. She can also:

• Liquidate some other assets to cover the costs of the buyout, such as her 401K or IRA. However, she must mind the tax implications of withdrawing the money early.
• Offer another asset of comparable value, like the couple’s marital home, any secondary dwellings like vacation homes, and similar.

Staying On as Co-Owners

In an amicable divorce where each party wants to keep their ownership interest, the spouses may decide not to distribute the business but continue running it jointly. If Samantha and George want to continue working at the cake shop, this may be the easiest solution. Provided they can nurture a respectful working environment, their business may proceed to flourish despite their divorce.

Another option is that both stay on as co-owners, with one spouse running the business while the other receives payments from future proceeds. This would cover the other spouse’s share of marital assets.

A potential issue, in that case, is that the business may stop turning profit. Another problem is that a productive working relationship after a divorce can be a challenge to uphold. Complete trust and respect given by both amicable former spouses are a necessity for co-ownership.

Selling the Business

The two methods mentioned above may suit some couples, especially if one or both have a particular interest in continuing the business. However, if they do not agree on either of the two methods, the last resort for ensuring both are compensated is to sell the business.

Usually, couples in the midst of a divorce may decide to do this with other types of property too. If neither wants to keep their marital home, the soundest decision is to sell it and split the proceeds. They can do the same with their joint business if they don’t desire to work together or continue it at all.

Nevertheless, there may be some issues here as well. If the business in question isn’t so successful or is rather obscure, it may take a while for them to find a suitable buyer. Another problem is if the spouses don’t agree on the business’ value. 

The couple should also consider how smart it would be to sell the business right now. Due to market fluctuations, the value of the business may significantly go up or down. 

Selling it in an economic downturn isn’t likely to leave either party satisfied. On the other hand, if they were to wait for a better economic climate, they’d have to continue running it as co-owners. This, of course, may also take a while. They would have to wait for the business’ marketability to improve enough to satisfy both of them.

In Conclusion

As you can see, a fair distribution of assets, especially businesses, isn’t impossible at all. Evidently, if both parties are looking to continue the business and are amicable with each other, a co-ownership seems to be the ideal solution. However, if the divorce turns sour or neither wants to keep the business, selling it is the most reasonable choice. 

Naturally, in some cases, buying out the other spouse’s half is an option too. It would allow the person interested in running the business to continue doing so with no strings attached. Nevertheless, each method has its pros and cons that must be considered carefully before distributing the business between the spouses.