How to keep a divorce from unravelling a small business

A look at what happens to businesses during a divorce, with an emphasis on business valuations.

It is quite common in the world of small businesses for spouses to run or own a business together. While having two spouses involved in a small business has many practical advantages, it can also pose significant challenges if the couple separates or divorces later on. As CBS News reports, there are about 3.7 million American businesses that are jointly owned by spouses, and even more where one spouse contributes significantly to the business that the other spouse owns. When any of these marriages end in divorce, an important question to answer will be what to do with the business.

Buying out the other spouse

This is the option pursued by many people who are going through a business divorce. With this option, one spouse simply buys out the other spouse's share of the business. Typically, the person who is more involved in the business will be the one buying out the other spouse. For example, if two spouses run a dental clinic, with the wife as the dentist and the husband taking care of administrative work, then in all likelihood the wife can simply buy out the husband's half of the business and outsource the administrative role that he previously occupied.

As Fox News reports, if the couple has a prenuptial or shareholders' agreement then those agreements may spell out the process for one owner buying out the other owner. If no such agreement exists then both parties will have to negotiate a buy-out process. This process will include conducting a business valuation. A business valuation tends to pose the most difficulties when dealing with a business divorce. The spouses may dispute the value of the business, for example, or dispute how much each spouse contributed to that business.

Other options

While buying out the business is often the best course of action for most business couples, it may not be a viable choice for all couples. For example, one spouse may have difficulty buying out the other spouse' share of the business or the spouses may argue over who should keep control of the business following a divorce. In these instances, selling the business outright and splitting the proceeds may be the best option. Doing so will also require a business valuation.

Finally, a less popular route is to continue running the business together even after a divorce. While this option may allow the couple to avoid a business valuation, it tends to be an unpopular choice for good reason. In most cases, if a couple feels as though their personal relationship has broken down, then there is little reason to believe that their business relationship will be any better.

Family law

When dealing with a business divorce it is important to talk to a family law attorney who understands how businesses are impacted by divorce. An attorney who has contacts with financial advisors can help smooth the otherwise contentious issue of business valuation and help clients understand what may be their best options going forward.