There are a wide variety of closely-held businesses, including professional practices (for example, medical, dental, law and tax) and retail businesses, such as groceries, specialty shops, internet businesses and restaurants. While each business will have its own set of problems and complications, there are basically three methods of dealing with a business during divorce.
With co-ownership, both spouses continue to own the business after the divorce. If spouses remain amicable, it may be possible to work together after a break-up. But this is not for the faint of heart; it will require a solid working relationship or high level of trust in the other’s management skills. In most cases, continued co-ownership is a recipe for disaster and not really a viable solution.
Sell the business and divide the profits
The pros of this option are that both spouses may profit from a sale of the business and can use the proceeds to invest in their own business ventures. Plus, spouses can avoid additional financial ties to their ex-spouse. The downside is that this could take some time; many businesses can’t be sold easily and it may be months before a buyer is found.
Buy-out the other spouse’s interest
In a buyout, one spouse keeps the business and buys (pays for) the other spouse’s interest. A buyout may be the best option assuming there are sufficient assets to complete the transaction. This can be accomplished if the buying spouse has enough cash or liquid assets available to pay off the selling spouse. Alternatively, the spouses could offset the selling spouse’s portion of the business with other assets, for example:
- The equity in a home.
- IRAs or 401(k) plan assets – however, these should be calculated at their estimated after-tax value in order to compensate for the eventual tax on withdrawals.
- Securities outside of qualified plans may be the most desirable in offsetting the value of a business because there is little to no tax liability associated with these accounts.
- If the business comprises most of the couple’s net worth, the spouses may have to enter into a property settlement note, which will be paid out over time to the selling spouse. A property settlement note is similar to a note at a bank – it should have a reasonable rate of interest, a definite term, and a principal amount.
Example: Susan and Steve have two significant assets: $100,000 equity in their home ($50,000 each) and the value of their business – $350,000 ($175,000 each). In order to keep the business, Steve will need to come up with $175,000 for Susan. He can give Susan his $50,000 equity in the home and provide her with a property settlement note for the remaining $125,000. Assuming a 5% rate of interest, Steve could pay Susan approximately $1,350 per month for ten years, thereby keeping the business undivided and assisting Susan with cash flow for ten years.
All resolution options should be discussed with a skilled divorce professional before a final settlement is reached.