One of the biggest challenges a divorcing couple faces is the equitable distribution of their property. In other words, answering the question, “Who gets what?”. For business owners, this includes the business they own together. Sometimes, the business might represent a vast majority of their overall net worth. In some families, the ‘business’ really is the law firm, accounting practice, or some other profession in which the uninvolved spouse might not realize they might be a partial business owner. In any case, it’s important to look a little more closely at the business to make sure that both spouses are getting fair treatment.
Here are five considerations when your divorce involves owning a business.
Would the business be considered separate or marital property?
This is a legal question, not a financial planning one. However, it’s a question that you should seriously explore, particularly if the business is a valuable one. This is especially true if you were the supportive spouse that might not have been directly involved in the business.
To better understand this, let’s look at the difference between separate and marital property. Separate property is property that one spouse received outside the marriage, such as gifts, inherited items, or separate property that was brought into the marriage. For example, a necklace inherited from your grandmother would likely be considered a separate asset. Conversely, a marital asset is one that is acquired or earned during the marriage.
Generally speaking, separate assets are not considered when dividing up assets. This might not be a big deal when you’re talking about a $500 ring. However, if you mistakenly assume that a six-figure business is a ‘separate asset,’ you might be walking away from a valuable part of your settlement. And don’t count on your spouse to tell you that you’re missing something. You should definitely talk with your lawyer to see if your marital assets includes the business.
What is the business worth? More importantly, what WILL it be worth?
When getting a divorce, it’s important to know the value of ALL the marital property. While financial assets (like assets and cash) are pretty simple to figure out, it’s more difficult to determine the value of a business. Not only is it important to figure out the business’ value now, but it’s crucial to have a good estimate of what it could be worth down the line.
A recent client came to our firm for divorce planning. She and her husband owned 4 businesses together, although he was the one involved in the day-to-day operations. Since they had children, she was focused on keeping the house. At the same time, she was content to let her husband have the businesses. Upon a closer look, we discovered that 3 of the 4 businesses were registered in her husband’s name, while one was registered under hers. Coincidentally, her husband’s businesses appeared to be profitable, while hers was losing money. While we were not hired to get to the bottom of this, we did recommend that she and her attorney look into hiring a forensic accountant to help her understand the combined value of their businesses.
Is the business viable without both of you?
The answer to this can be relatively simple or it can be complex. For example, the owner of a law firm would probably be able to continue her practice without her husband, who works at another job.
But what about a family business, where both partners put a lot of work into making it successful. That might be a little more difficult to figure out, especially if you had complementary roles. Let’s imagine a restaurant, where the husband is the chef, and the wife handles the business aspect. The husband hates managing the books, and the wife doesn’t like to cook. It might be tempting for the husband to keep going without his wife managing the books. However, the restaurant industry is notoriously tough, and there would be a strong possibility that he could not keep this business viable without her. If he gives up a lot of other marital property (like an IRA) in exchange for his wife’s stake in the business, he could set himself up for failure.
Can you sell the business to a third party?
Many businesses can actually be sold to an outside party. This might be a consideration if:
You know the business has some value
Neither one of you is particularly interested in owning the business after the divorce
The business is able to operate without either of you.
That last point might be debatable, particularly if it’s a business that you’ve built from the ground up. However, with the right prospective owner & good management, most viable businesses can continue without their original owner or founder. And if that’s the case, a reputable business broker can help connect you to potential buyers. Just like selling a house after a divorce, selling a business often helps both parties move on with some financial stability.
What other assets do you and your spouse own?
If you sell the business, that’s great. You and your spouse can negotiate an equitable distribution of the net proceeds and move on. However, if one of you holds on to the business, then it gets a little tougher.
In that case, you and your lawyers might be negotiating where the business lies with respect to all the other marital assets. If most of your combined net worth is tied up in the business, then you should probably be thinking about making sure the business is properly valued. Conversely, if the business is a relatively new venture, or is small in comparison to your retirement plans, pensions, and investments, then it might not require as much focus.
If you’re the one deciding to part ways with the business, you’ll want to consider the fact that a successful business can be considered an appreciating asset, like investments are. This contrasts with things that depreciate over time, like cars and furniture.
If you’re the one holding onto the business, you’ll want to consider what happens if the business goes south. If you give up your 401k in order to keep 100% of the business, then you’re placing all of your eggs in one basket. If something happens, you could be left with nothing.
Divorce is never easy. When a divorcing couple owns a business together, it makes dividing up the assets a little more difficult. However, for the long-term benefit of both sides, it’s important to take a closer look at how the post-divorce business fits in both of your financial plans.
If you find yourself struggling to make financial sense of your divorce, you should consult with a financial professional that specializes in divorce work. Working with a Certified Divorce Financial Analyst® is a good way to take that first step towards a more financially sound future. Schedule your appointment with Lawrence Financial Planning today. We will always give you professional advice and walk with you every step of the way. We also invite you to one of our monthly Divorce Workshops. Find the details on Facebook and Instagram, or visit our website.