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The basic issues of dividing your shared business in a divorce

| Apr 17, 2020 | Divorce |

Divorce can be a challenge for anyone, but especially for people who operate a shared business or professional practice. How is this divided in an Arizona divorce?

The first order of business is to determine how much of the business is considered community property. This will depend on the facts of the situation. Did one of you start the business before the marriage and the other joined after the marriage? Were both of you part of the business before the marriage? Did you found the business together after the marriage? The specific facts of how and when the business was created will have a large impact on the determination of whether it is part of the community estate.

Once that determination is made, the business itself needs to be valued. This can be a complex process, as there is generally no stock price for a small private enterprise. You and your spouse may wish to hire independent professionals to do the valuation. It can also be helpful to have an attorney with a background in corporate finance.

The person valuing the business will use one (or more) of three main approaches toward valuation:

  • Asset approach
  • Income approach
  • Market approach

The valuation will need to consider the business’s bylaws, the partnership or shareholder agreement, and any agreements discussing how the business is to be valued and/or divided. There could be debt to consider, along with any third-party agreements and the interests of any other owners.

You and your divorcing spouse may each have your own expert, and those experts may use different approaches. If you cannot come to an agreement on how much the business is worth through negotiation or mediation, you will need to present the question to a divorce judge.

Once the value of the business has been determined, you will need to determine each spouse’s interest in the business, if they are not the same. For example, if one spouse founded the business and the other joined several years later, the first spouse may have a greater interest. Also, if one spouse has more control over business decisions, that spouse could have a greater interest.

Once the interests have been determined, you will need to decide how to divide the shares. Generally, you have three choices. One spouse can buy out the other, sometimes using credit or sometimes bartering with other property. You can sell the business and divide the proceeds. Or, you can remain co-owners and continue to operate the business together.

This is a very high-level discussion of how a shared business is divided in an Arizona divorce. For specific information about your own business, discuss your concerns with an experienced divorce attorney.