Every divorce is emotionally challenging and involves its own individual complications. One such complication is when either or both parties of the divorcing couple own a business, either individually or together.
There are many factors to consider when business owners divorce, including a slew of legal and financial aspects. One key way of simplifying this process is the existence of a pre-nuptial or post-nuptial agreement in which decisions about how the business would be separated following a relationship breakdown are decided. When such a document exists, many of the complexities described in this article can be avoided entirely.
In cases where no pre- or post-nuptial agreements exist, the business will need to be independently valued to determine its fair market value. This will help determine how (and if) its value will be split between the divorcing couple, how ownership will be allocated going forward, and any tax implications arising from the divorce. In addition, an assessment will be made regarding the future viability of the business.
Business valuation
The business will be valued by an independent expert, such as a forensic accountant, who will apply appropriate measures based on the type and size of the business. They will review the business’s income, assets, debts and liabilities and compare them to industry averages to determine an accurate assessment [1].
Property division
In Colorado, marital property is not divided equally. Instead, it is divided equitably, which means that courts will consider various factors including the extent to which each spouse has contributed to the business and improved its value, along with the financial situation of each party.
If the divorcing couple has children, child support arrangements will be considered as part of the business owners’ financial commitments, and an assessment will be made to ensure they align with the business’s financial capacity.
In some cases, particularly those where the couple had been running the business jointly but one party will withdraw their interest post-divorce, the spouse who keeps the business may be required to pay alimony to their ex for a period of time that will be determined by the court, based on the length of the marriage, each person’s financial situation and their contribution to the business while married.
There are several potential scenarios for a divorcing couple’s business post-divorce. They may choose to remain co-owners of the business and work together without the previous romantic interest. This is a situation that can quickly become fraught, so it is essential that if this route is chosen, a defined agreement is drafted at the outset defining roles, responsibilities and dispute resolution mechanisms.
A more common agreement is for the partner with the greatest interest in the business to buy out their spouse. In this situation, the spouse who retains the business will own it fully after the divorce, while their ex will have no further claim on it regardless of its future success or failure. The financial terms of this transaction must be carefully negotiated to ensure that a fair outcome is achieved that is compliant with Colorado divorce laws.
Recommended approach to reach an amicable outcome
It is recommended that the divorcing couple seek legal advice from a family law firm that can support them in reaching an agreement that is mutually acceptable to both parties. The divorcing couple must maintain open and honest communication throughout the divorce process and work together to maintain the viability of their business during this difficult time.
Should they find it difficult to work together while negotiating a divorce, they may need the support of a mediator or another impartial advisor to help them agree on their goals and expectations, reduce conflict and navigate the complex legal wranglings that will ensue in determining business ownership and the allocation of assets following a marital breakdown.
In some circumstances, an attorney may recommend that a temporary restraining order or injunction [2] be applied to prevent either party from selling business assets without the express consent of their business partner/soon-to-be-ex-spouse. It is important that the business remains viable during the divorce proceedings.
Whatever decision is made regarding ownership of the business post-divorce, it will be necessary to review any business plans and financial strategies to ensure they take account of the owner’s new financial situation. This is essential to ensure the continued success of the business as well as the long-term financial stability of its owner.
In conclusion, navigating a divorce when you own a business is a complicated process that requires expert legal guidance, financial support and impartial advice to ensure that a mutually acceptable outcome is achieved wherein neither party is disadvantaged and the business remains viable.
To discuss your individual circumstances and find out how we can help you to navigate the complex waters of divorcing as business owners, contact Lewis & Matthews, P.C. today. We will help you protect your personal and business interests and do all that we can to ensure a fair and equitable resolution for all parties.
Resources:
[1] https://denverchamber.org/2019/06/11/whats-it-worth-how-to-value-your-company/
[2] https://law.justia.com/codes/colorado/2016/title-14/dissolution-of-marriage-parental-responsibilities/article-10/section-14-10-107#:~:text=(B)%20That%2C%20if%20genetic,evidence%20at%20a%20later%20date.
