No matter how long a couple is married or what their financial state is, a divorce requires them to identify, value, and divide their assets. If their finances involve only bank or retirement accounts, this can be a simple process. However, if they have a business, the division of business interests can become complicated. In these situations, it is best to hire a Pennsylvania divorce attorney to help ensure that you receive a fair divorce judgment when it comes to both your personal assets and your business assets.
Valuing Business Interests in a Divorce
The first step in dividing business interests in a divorce is to determine their value. The value of a business is often a contentious issue during a divorce. When a private company is in question, its value can be more challenging to ascertain since it is not publicly traded.
Typically, there are three different methods of valuing a private business; by its assets, by the market, or its income. In most divorces involving private business interests, it will be necessary to hire an independent qualified valuation professional such as a:
- Accredited Senior Appraiser (ASA)
- Certified Business Appraiser (CBA)
- Certified Public Accountant (CPA) with an Accredited in Business Valuation (ABV)
It is quite common for each spouse to hire their own valuation professional, and it is highly recommended if one spouse will be buying the other spouse out of the business. If the divorce winds up in court, the judge will need to decide which expert has the more credible valuation of their private business, which will be more expensive and time-consuming than agreeing on a settlement.
To determine the value of a private business in a divorce, the hired financial experts will examine the financial records of the company, including:
- Profit and loss statements over a certain period of time
- Assets, such as equipment, inventory and real property
- Cash flow
- Customer goodwill
The Future of the Business after a Divorce
Once the value of the business is determined and agreed upon, the spouses will need to decide what will happen to the company after the divorce. There are generally three options:
Buying Out One Spouse
This is the most common method for dividing business interests in a divorce. One spouse will purchase the other spouse’s interest in the business. For example, if the business is valued at $1 million, one spouse will pay the other spouse $500,000, and they will then own the entire company. In most cases, transfers of property in a divorce are exempt from taxes under IRC § 1041.
It is important to note that in certain businesses, only the licensed spouse is allowed to own the business, which could dictate if a buy out is an option for the other spouse or not. Consulting with a divorce lawyer in Pennsylvania can help you determine if this is a viable option for you or not.
Selling the Business
Another option is for the divorcing couple to sell the business to a 3rd party and divide whatever profits they receive. If one spouse insists on keeping the business, however, a court order may be necessary. Sometimes this is not the best option as it may take years to sell a private company, and the spouses may disagree on how much they should sell it for. The couple should consider how they want to manage the business until it is sold.
Another factor to consider if you and your spouse are considering placing the business up for sale is that the value of the business will be dependent upon market fluctuations. If an economic downtown is occurring, the business will naturally be valued lower as opposed to if it is put up for sale when the economy is thriving. Depending on the state of the current economy, selling the business may not be the best option when it comes to putting more money in both of your pockets. Speaking with your hired financial advisors and your divorce attorney in Pennsylvania can help you make the best decisions given the state of the market and your financial goals.
Continue Co-Ownership of the Business
Finally, although rare, the couple many decide to remain co-owners of the business. If the couple is able to keep their emotional challenges out of their business and their divorce is amicable, this might be the best solution. With this option, one spouse could take on the primary management responsibilities of running the business, and the other spouse could agree to accept a percentage of the business’s future profits as part of their marital assets. This option involves the risk that each spouse could receive more or fewer assets by keeping their ownership in the business.
If the co-ownership option is elected, the couple must remain cordial to each other in their working relationship. They should have a formal written contract, for example, an operating agreement or a shareholder’s agreement to guide their future business relationship just as any unrelated independent investors would.
Making the Decision
These are the most common ways that couples deal with their business interests in a divorce. There are other, more creative ways available for spouses who do not find any of these options to be a good fit for their situation. Before making your decision, be sure to discuss the pros and cons with your Pennsylvania divorce attorney, tax advisor, wealth manager, and other financial advisors before making a final decision and implementing it.
Divide Your Business Interests with an Experienced Pennsylvania Divorce Attorney
We know the stakes are high when you are a private business owner filing for divorce. Our legal team is here to help you evaluate your options and determine the best course of action for your business in your divorce. We know that not every business or every divorce will require the same strategies and solutions, and we work with you to ensure the best future for you and your business. Contact Petrelli Previtera, LLC today at (215) 523-6900, chat with a live agent, or schedule your consultation online.