Dividing business interests in a divorce
By Jeffery M. Leving
The asset division determination portion of a divorce can have a negative impact on a business or professional practice. Business owners can take steps to reduce this risk. Ideally, the business owner would already address this possibility with a prenuptial agreement. If drafted wisely, these agreements can help to shelter business interests in a divorce.
Absent a prenup, the first step generally involves determining whether the business interests are marital or non-marital property. If the business began prior to the marriage, the business owner likely will argue that the business is non-marital property and not eligible for division during divorce. Even if this is successful, the court may still rule that any growth that occurred during the marriage is a marital asset. As such, the divorce could still have a negative impact on the business.
Business owners who find themselves navigating a divorce can benefit from an understanding of the process and their options:
Get an independent valuation
It is important to know what the business is worth to help guide negotiations during divorce.
There are many ways to determine the value of a business, and each method can produce a different result. The most common approaches include the asset, market, and income methods. It is common for each spouse to hire their own valuation expert. This can result in two different valuations for the business. It is generally more efficient for the parties to negotiate an agreed-upon value instead of litigating this issue.
Sometimes, a party to a divorce will attempt to hide assets. If this is happening, you’ll need a lawyer with experience discovering assets that divorce litigants have hidden. In my experience with high-asset divorces, I believe it’s essential for our clients that we discover all marital assets, so that the court is fully aware of the marital estate that’s being appraised, evaluated and divided.
Real estate holdings are another asset class that do not always have an exact dollar value attached. Their worth, if unknown, will have to be determined for the purpose of negotiating or litigating the divorce.
Consider buying out your spouse’s interest
Once a valuation is agreed upon, it is common for one spouse to buy out the other spouse’s business interest. This can be done with an outright purchase. If the business owner does not have enough liquid assets to complete this purchase, they can consider support from an investor such as a private equity firm.
Another option involves negotiating a trade. In exchange for full ownership of the business, the business owner could provide the spouse with the family home, another piece of real estate or some other asset that has similar value.
Selling the business
Business owners may decide to sell the business and start over with a fresh idea, take a different direction or simply retire to pursue other interests. If this is the case, both parties would likely split the proceeds from the sale during the divorce.
Regardless of the desired outcome, it is wise to act strategically and timely to protect your interests. Legal counsel can review the situation and advocate for your interests throughout the divorce process. At the Law Offices of Jeffery M. Leving Ltd. in Chicago, we represent spouses, ex-spouses, partners and ex-partners in complex matters involving divorce, children, custody and parenting time in Illinois and nationally.