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How to divide a business in a divorce

On Behalf of | Dec 1, 2020 | Divorce

Dividing up assets during a divorce is challenging enough, but when the couple is in business together, there are even more complications. If each is a co-owner, there are usually three ways to proceed when deciding what to do about the company.

In most cases, there will need to be a valuation of the business, and this can happen a number of ways. Doing this first may help the couple make a more informed decision about division.

Common valuation techniques

According to Inc., assessing what a company is worth is not a straightforward process. However, there are three valuation methods that tend to determine a realistic value:

  • Assets-based: This is the most basic method but also tends to result in the lowest value of the business. This technique looks at the difference between the company’s market value and the business’s net assets.
  • Comparables: In this method, assessors consider the value of comparable companies. Smaller businesses, however, are worthless compared to similar Fortune 500 companies.
  • Discounted cash flow: This technique takes into consideration how much profit the company will make over future years, and the value is more realistic if the business has had a good track record over the years.

Options for business division

Once the couple has a better idea of what the business is worth, the American Bar Association discusses the three main options from which most people choose. One option is for one spouse to buy the other spouse’s interest and become sole owner. This option is only viable if there is enough cash or liquid assets, or if the person is able to secure a loan.

Another option is for the couple to sell the business and share the profits of the sale. Some challenges to this option are that both spouses need to agree to sell, it may be hard to find a buyer or the couple may not agree on the sale price.

Another option is to keep the business and continue working as co-owners. This option is rare, as emotions and resentment make it more difficult to work together.

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