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Divorce and the Family Business
Recently, I spent some time talking to a couple currently in the process of having their family business valued. This couple, together for 15 years, is divorcing—having worked together at the business for much of their time together. Both spouses want their fair share of the business' value.
Now they face having to appraise the business and figure out what's next—from keeping the business with a sole owner to selling it and allocating sale profits among involved parties. What's more, both have a vested interest in keeping the business running and maintaining profitability during the divorce process, until sound decisions about the future are secured.
This story is not uncommon. Divorce can be damaging to small business owners, particularly if both parties involved in the divorce were also highly ranked in their business. How do you decide what's fair, when both of you have been heavily involved in this family venture?
Here are some tips on how to keep your business going, even after you've divorced:
Consider every level of potential effect from the divorce—from potential lost revenue to communicating with employees. Some potential questions to ask in regards to how you will handle the business include:
- Are you planning to sell or keep the business?
- Will you both continue to work there, or will one of you buy out the other?
- Can you afford to buy out your spouse, if that is your interest?
- How will you manage and run the business during the divorce process?
Make these decisions early in the divorce proceedings. In addition to getting the buy-out-or-sell decision out of the way, it may also provide you some piece of mind and security during your divorce.
Get a business valuation
Regardless of which above decision you make, you will need to know your business' overall value. Hire a neutral third party—an accountant, business appraiser, or financial analyst who specializes in business valuation—to walk you through the steps. A business valuation takes into account all assets of the business, including the "intangibles." Often, both spouses in this situation will hire their own valuation expert for comparison purposes.
In today's economically challenged world, property values and future earning potential may both be considerably lower than years past, which is one reason why it is particularly important to have an accurate business valuation completed. The business valuation will take into account all aspects of the company—assets, liabilities, earning potential—to anticipate how lucrative the business' future looks. To help the process along, have available tax returns or loan applications that you have filed as a business.
In the state of Colorado, a jointly owned business is considered marital property and will be split "equitably." If the business is owned by one or the other it may not be considered joint or marital property, but it still may be affected if both of you played a major role in running the company.
The court will take into account the valuation of the business and the roles that each of you played in running and maintaining the business to make its decision on who will get what in the divorce. The court may order a buy-out from one of you to the other. If the two of you can't come to an agreement, the court may decide to order that the business be sold. The court may also be open to the two of you continuing to work together if your divorce is amicable.
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