Deciding how to divide assets and debts during a divorce is challenging. However, things are even more difficult if the couple owns a business together.
The couple needs to decide how to divide the business, and there are generally three options.
How to conduct a business valuation
Before deciding on how to divide the business, it is important to find out how much it is worth, as this may affect the decision. The U.S. Chamber of Commerce discusses the three main approaches used to assess a business’s value:
- Earning value: This evaluates the company’s ability to produce future profits. Two of these approaches include discounted future earnings and capitalizing on past earnings.
- Asset-based: This examines the assets and liabilities of the business. This occurs via one of two approaches: Liquidation or book value.
- Market value: This approach compares the business with similar companies that have sold recently.
Financial experts may also use a combination of these approaches to determine a company’s true value.
One common option for divorcing couples is for one spouse to buy the other spouse out and run the business solo. This is often the cleanest and easiest option, as long as the other spouse is ok with leaving the company.
If neither spouse wants, nor can afford, to keep the business, selling it to a third party is another option. This may take more time to find a buyer, but it relieves both spouses of the company.
An option that occurs more rarely is to keep the business and continue to co-own it. This generally works best if the spouses respect each other and can communicate. However, even if the two partners do not get along, it may work to have one ex-spouse run the business and the other one is a silent partner.