Dividing a business during a divorce can be an extremely difficult and stressful process. Unless there is a prenuptial agreement that clearly divides the ownership interests or the two individuals still want to be business partners, expert legal counsel is needed to keep the business assets safe. Most individuals choose to buy out the portion of the ownership interest from the spouse that does not want to continue the business. It is rare for the two to stay together in business if they cannot keep the marriage intact.
A good approach is to have a divorce team with your divorce attorney and a financial advisor assessing the best route to get the other spouse out of the business. The buy out strategy can include:
• Using a marital asset such as real estate, stocks, retirement funds, or cash
• A property settlement note that allows for a longer buyout of the amount owed with interest
• An Employee Stock Ownership Plan (ESOP) to generate funds by selling ownership interest to employees
• Selling the business and dividing the proceeds
ESOPs can work well if a business is worth more than $5 million. ESOPs are complex but they are tax deductible, so it can become a better scenario for your business. And since employees receive a small interest in the business, they typically become more engaged employees because they want the business to succeed even more.
An ESOP is controlled with a trust fund and a trustee, and the employees are the financial beneficiaries of it. The business makes tax deductible cash contributions to the ESOP and then the trust funds buys ownership interests based upon current values. Each employee gets a small interest annually and can cash in their portion when they leave or retire from the business. Interestingly, ESOP businesses are shown to grow eight to 11 percent faster than normal businesses, according to the National Center for Employee Ownership. Quicker growth equals a bigger increase in value. Thus, ESOPs can be the best route if the business forecasts growth and profits and values its employees as an integral part of the operation.
What’s more common, though, is that the business must be sold outright as a large portion of the assets are tied up in the company. This can be an excruciating process as it will leave one or more spouse without work, and the court must approve the value of the business for sale. The court will analyze the opinion of value from appraisers and accountants.
No matter which route is best, both sides need proper legal representation. Most likely one spouse will have to pay child or spousal support, so adding in the division of a business can create a financial hardship. Both spouses can benefit from mediation or a collaborative divorce to mutually work through the issues with their attorneys and accountants.
The Maggio Law Firm has many years of experience in divorce and the division of assets. Orange County Divorce Attorney Gerald Maggio is known for his legal expertise and giving clients compassionate guidance through the maze of issues that are raised in a divorce. Maggio is active in the Orange County Bar Association, Los Angeles County Bar Association, the Riverside County Bar Association, the Orange County Barristers, and the Irvine Chamber of Commerce.
For more information:
The Maggio Law Firm, Inc.
Orange County Office
8105 Irvine Center Drive, Suite 600
Irvine, CA 92618
(949) 553-0346 Fax
3750 University Avenue, Suite 670
Riverside, CA 92501