The subject of property division can be a major source of contention between a couple during divorce proceedings. This issue can be complicated even further if the divorcing spouses are also co-owners of a closely or privately held business, as the division and future of their business must be considered in addition to an already emotional and difficult set of issues in a divorce.
Equitable Division of a Business
In Illinois, if the business was established during the marriage and is considered marital property, it is subject to the doctrine of equitable allocation . But while the business’ assets and debts (and in general, its overall value) must be divided between the couple, it is important to note that “equitable” means fair but does not necessarily mean “equal”.
However, applying equitable allocation to a business may be more complicated than the division of other marital assets, such as the value of a house or a car, or other assets which have a readily ascertainable value, such as publicly traded securities. A business’ value can be comprised of numerous varying factors such as equipment, inventory, accounts receivable, accounts payable and third-party ownership.
In addition, the value of a privately held business can also be affected by intangible assets such as “goodwill”, which is associated with the purchase of one company by another and relates to a brand name, solid customer base, good customer relations, good employee relations or proprietary technology.
Options for Business Partners That Are Divorcing
Generally, a divorcing couple has three options regarding the future of the business that they co-own:
- One spouse can buy out the other spouse’s interest in the business;
- They can continue being co-owners of the business post-divorce; or
- They can sell the business and equitably divide the sale proceeds.
There are pros and cons to each option. For example, Option 1 would allow one spouse to continue operating the business and the other to have a higher asset allocation in the divorce – however the spouse retaining ownership would have to deplete assets from either the business itself, or another portion of the marital estate, to complete the buyout. In addition, reaching a valuation on a business can be difficult, time-consuming and costly during the divorce process. Option 2 would allow the couple to retain his/her interests in the business (in the event that they believe the business will only continue to grow in value) – but there can be scenarios that are easily imaginable where divorced spouses would not necessarily make the most ideal business partners. And with Option 3, while selling the business may be the “cleanest” option of the three as far as the marital estate split, obtaining a valuation or appropriate sale price can be tricky, along with one or both parties wanting to maintain an interest for financial or sentimental reasons.
Prenuptial or Premarital Agreements and Your Business
In addition to the intricacies involved with addressing the ownership and future of a business during a divorce proceeding, this issue often arises with individual or joint business owners that are contemplating marriage or have upcoming nuptials. For more information regarding the specifics of prenuptial or premarital agreements, please visit our blog from November 11, 2020.
Let our top-rated divorce and family law attorneys advise you on the best course of action regarding your property division and asset valuation. Working with Davis Friedman, LLP, you can trust that you are receiving a skilled, strong and passionate advocate for your case. Contact us at 312-782-2220 or visit our home page to learn more.
