3 questions to help guide division of business interests during divorce

Will divorce impact my business?

In Tennessee, courts generally divide marital property using the legal theory of equitable distribution. This means the courts look to provide a fair, not necessarily equal, split of the property. When it comes to division of business interests, the following questions are important:

#1: Is the business interest a marital asset?

During divorce, the courts will generally put assets into one of two categories: marital or separate. Marital assets are subject to division during divorce, while separate assets are not. Common examples of a separate assets include an inheritance gifted to one spouse and property owned prior to the marriage. It is important to note that the asset must remain separate. Putting the inheritance or other separate funds into a joint banking account will likely result in loss of separate status.

When it comes to business interests, the court deciding whether the asset is marital or separate will generally look at when the owning spouse started the business. The court will also consider the funds used to start and maintain the business. A business owner has a strong argument for the court to classify the business interest as separate property if ownership occurred prior to marriage and the business was funded through one partner’s own, separate finances. However, the other partner could counter this argument with allegations that their personal efforts contributed to the establishment or growth of the business. It is important to take these and other potential arguments on either side into consideration when drafting a negotiation strategy.

#2: How much is the business worth?

It is important to get an accurate business valuation to determine the worth of the business. This will provide guidance during negotiations. There are many different types of business valuation strategies. Three of the more common include the cost approach, market approach and discounted cash flow approach.

The cost approach uses the cost to rebuild or replace the business as guidance when determining the value of the business. The market approach looks at a relative value and compares the values of other, similar businesses to determine the value of your business. The final approach, the discounted cash flow approach, is the most detailed and uses a financial model to review many estimates and assumptions about future performance to come up with a valuation.

#3: Which option for the future of business is in line with your plans?

In most cases, business owners who go through divorce can buy out the other spouse, sell the business, or remain in a co-ownership relationship with their future ex-spouse. The American Bar Association, a group of legal professionals from throughout the country, report the most common choice is the first option. Most business owners choose to buy out their spouse. This can be achieved either through use of funds in banking accounts or negotiating ownership in exchange for another marital asset of greater interest to the other spouse. This could include the family home or retirement accounts.