Dividing a Business in Divorce

By | Published On: January 13, 2020

When the marital estate of a divorcing couple includes the ownership of a closely-held business, a number of complicated issues must be addressed. Valuation of this type of asset is complex, because, in general, there’s no public market for the shares of stock of a private company. Even if a value can be placed on the shares, the time when the value may be realized is likely to be at some undeterminable time in the future. In addition, the shares of such business interests are almost always non-transferrable, so that the means of transferring value to the non-titled spouse will not be straightforward.

But perhaps the most difficult aspect of dividing the value of such interests lies in the reality that the value of the shares at the time of a triggering event, such as the sale of the company, is unknowable. Thus, both partners in the marriage must grapple with how much risk he or she wants to assume with regard to receiving an equitable portion of the value of the company.

Let’s assume that the non-owner spouse is the wife. Some of the factors which are relevant to how much risk she may be willing to assume include the:

  • Confidence she has in her husband’s competence to manage and grow the value of the business
  • Future prospects of the industry in which the company operates
  • Security of having a possibly smaller buyout now, as opposed to remaining invested in the company for a potentially significant period of time and reaping a portion of the greater value of the stock later when the company is sold

The husband, who is the owner of the shares of stock, similarly has to assess the risk of the options available to him. How will he feel if he buys out the wife’s interest now, and the business goes belly up later without a sale to a third party as anticipated? In contrast, is it fair for his wife to receive a portion of the value of the company at the time of its sale when the value is largely traceable to his sole efforts?

Likely both parties will benefit from the advice of their own business expert who can help each of them assess the relative risk of the various options. However, ultimately, each party must make his or her own decision as to how much risk he or she is willing to assume.

If the assets in your divorce include an ownership interest in a private company, find an experienced family law attorney who can help guide you through the complexity of the valuation process and who can come up with creative approaches for transferring a portion of the value of the company to the non-owner spouse.