U.S. divorce law is based on a concept called "marital property." Whether it's a house, a car or a business, anything acquired during the marriage most likely counts as marital property, which is subject to equitable distribution. In the case of a business, it doesn't really matter whether the husband or wife was a partner or shareholder in the business. Even if it was a sole proprietorship with one spouse at home raising the children, the law assumes the survival and growth of the business can be attributed in part to the support of the stay-at-home spouse. So while the spouse who is active in the business will most likely be the one who keeps it after the divorce, the ex-spouse is entitled to a share of the value of the business--often half.
Among the exceptions to the marital property rule, depending on the state, are property either spouse owned before they married, and property and gifts inherited by one spouse during the marriage. Suppose the wife founded the business five years before she got married. The value of the business at that time is hers alone, but any growth in the business since the marriage counts as marital property. The court would call on appraisers to determine the value of the business at the time of the marriage and its value at the time of the divorce. The difference, declared marital property, must be divided fairly.
When husband and wife are equal partners but unwilling to remain in business together, which one retains ownership becomes a matter for negotiation. Perhaps one will get the business, while the other gets the house and the retirement plan. Or one keeps the business but has to pay the other half its value. That arrangement can pose serious cash-flow problems. "The company may not be liquid," says William S. Friedman, a family law attorney with law firm Friedman and Babbitt Co. LPA in Columbus, Ohio. "Suppose the court goes on fair market value and requires one [spouse] to buy out the other. That's scary."
Even determining fair market value can be tricky, notes Columbus family law attorney Robert Wistner, because professional appraisers practice an inexact science. He tells of one case in which he represented a husband who had purchased a company. When the man and his wife divorced, two appraisers valued the company, one at $5 million and one at $5.5 million--surprisingly close for independent appraisals. Nine months later, the ex-husband sold the entire company for $25 million.
In a case like that, what seems to be a generous settlement can turn out to be less so. "Divorce for an entrepreneur is very complicated," Wistner observes.
To manage a buyout, the partner retaining the business may have to make payments to the ex-spouse over time. That can create a long-term drain on income--especially if the nonworking spouse is also entitled to spousal support (formerly called alimony). "Years ago, the husband would keep the business and pay alimony," Friedman says. "Now the spouse who owns the business can end up dividing the business with a nonworking spouse, plus have to pay spousal support from monies generated by the business."