As part of the divorce process, many assets and liabilities will have to be divided between the two spousal parties through a process called equitable distribution. Essentially, a court will classify property as either marital or separate, place a value on the property, and then distribute amongst the spouses. A bank account is an easy item to value. However, if there is a business involved, the process can get complicated.
Firstly, business valuation for divorce purposes can be much more challenging than valuations for other purposes.
- Rules differ among jurisdictions.
- There are no clear valuation guidelines in most states (i.e. there is no specific definition of value in state statutes governing divorce).
- Divorce courts exercise a great deal of discretion.
Secondly, if the business is the primary asset, things can get exponentially complex if:
- You own the business with your spouse and you end up being business partners with your soon to be ex.
- You have to take out debt on the business in order to meet your equitable distribution obligation.
- You’re forced to liquidate the business, eliminating your primary source of cash flow.
- You have non-related business partners.
The good news is that there are ways to protect yourself ahead of time so that your business will survive. You can:
- Get a postnuptial agreement.
- Get a buy-sell agreement.
- Keep personal and business expenses separate so the business remains your separate property.
- Put the business in a trust to remove it as a marital asset.