How your business is effected during a Divorce.
Like everything else you own, your business is an asset. When contemplating divorce, you will be required to equitably divide your community interests in any assets acquired during your marriage. This includes your business.
However, equitable division does not necessitate that every single item be split in half. Rather, Arizona follows the aggregate theory of community property meaning that each of you will receive a share of the assets which will be equal in value, but not equal in kind.
To determine what will happen to your business you need to consider several things. First, did you make any agreements or plans for this eventuality? Perhaps you and your spouse entered into a pre- or post-nuptial agreement which specifies what happens to the business. Or, perhaps the business itself has agreements in place detailing what occurs when one or more owners divorce. These documents should be reviewed closely.
Second, you need to determine if the business is community property or a mix of sole and separate property and community property. If the business began after you were married, it is community property. If the business began before you were married and then continued for any length of time after you were married, it is likely a mix of separate and community property. In the latter case, a determination will have to be made about what portion of the value of the business is sole property, and how much is community property. Arizona courts have fashioned differing valuation methods depending in large part on what is driving the increase in the value of the business.
Third, you need to consider the value of your business. This usually means that one or both of you will want to a hire a person experienced in business valuations to render an opinion on the value of the business. Care should be taken to make sure this person will qualify as an expert witness at trial, in the event you are not able to settle out of court. In this scenario you will want to hire your own expert. Depending on the facts of your case, the parties may want to use a common expert in efforts to avoid the courtroom battle as that expert will value the business and there will be no discussion beyond that one expert’s opinion as to the value. Regardless, you will need to work closely with the valuation expert to make sure he/she has all relevant information about the business.
Fourth, and absent any pre- or post-nuptial agreements, you will want to explore settlement options with your spouse. There are several options available, but the most common include:
1. A straight buyout of your spouse’s interest in the business
2. In the case where both spouses are owners of record for the business, an agreement that they will continue as individual owners and continue to work together. If this is utilized, you should probably include a buyout provision in case you find you cannot continue working together.
3. In some cases, a business can be split as where there are two different locations for a restaurant
4. Exchanging other assets of the marriage as an offset against the value of your interest in the business
5. Sell the business outright and divide the proceeds
There may also be considerations as to the running of your business while the divorce is pending. However, that is beyond the scope of this post. Suffice it to say that you will need the help of a capable attorney and you will need to consult closely with him/her in this regard. Platt & Westby, P.C. has over 40 years of experience handling property division in Dissolution cases, call to make an appointment today! 602.277.4441