Lee Rosen, retired divorce attorney and founder of the Rosen Law Firm, shares his thoughts on splitting up a business during a divorce.
Do I have to share ownership of my business with my former spouse? I’m Lee Rosen.
We had a gentleman come in to the office a few months ago who owns a bakery. And he and his wife actually started the bakery together and things got off in a difficult way, not a lot of revenues. She agreed to come in and work in the front, he was working in the back, he has a history in baking. And they really, over time, they built a customer base, and got the business going. It’s not uncommon for husbands and wives to work together on a new venture like this.
Unfortunately, working together isn’t always good for the marriage, that’s just the reality, and I think starting a new business can make it especially stressful. And so over the couple of years that they worked together in the bakery, the relationship just disintegrated, and we see that with a lot of businesses. Starting a business is tough on a relationship. Well now as the marriage unravels, we’ve got this business that’s owned by husband and wife, we’ve got a business that at some level requires both the husband and the wife to be involved. Where do we go? What do we do? What’s going to happen?
So what do we know? Well we know with absolute certainty that both spouses are entitled to a share of the value of the business, but that doesn’t mean that we’re going to divide the business itself. It means that we’re going to divide the value of the business. So in this bakery example, what’s it worth? Let’s say, pick a number, it’s worth $100,000. Well husband is entitled to 50,000 of those dollars and wife is entitled to the other 50,000, probably. There are factors that can impact that, but generally, we’re dealing with a 50-50 distribution.
How do we address that? Lots of possibilities. This where the uncertainty kicks in. There are some things here that are hard to predict and hard to know. We could give the bakery to the husband and pay the wife $50,000, that sounds simple and straight forward, except the husband may not have $50,000 to pay the wife. He may have to sign a note and pay her over time, he may have to go to a bank and borrow the money. It becomes challenging, because the business may not have the cash flow that he needs in order to pay her off. She may need to remain as a partner in the business as we move forward.
Now what about her working in the business? What are we going to do about that? Well, in an ideal world she could move on and quit working in the business, and he could hire someone else, so that they’re not dealing with the day-to-day conflict. But realistically, in a lot of small businesses, in order to preserve the value of the business, they may have to find a way, even if their romantic relationship is over, to continue working together in the business, side-by-side, until it reaches the point where they can afford an employee.
Another option, another possibility, and it might be the best way to go in this scenario, is simply to put the business on the market, to sell it, to get the hundred thousand dollars from a buyer, and just split that money and have both parties go then their own direction, invest that money in other ways, and move on with their lives. But the one certainty is we’re going to divide value, the uncertainty is exactly how we’re going to do it.
Whatever you do, whichever option you choose, the thing you need to remember is that your arrangement is permanent. You’re going to have one shot at reaching agreement or one shot in court if you have to do it that way, and you’re going to have to live with this arrangement indefinitely.
My experience tells me that doing something that gets the two of you disconnected is probably the best thing. If you can figure out a way to not work together and to not own this asset together, that’s probably the best way to go. This is, after all, a divorce we’re going through, and doing a divorce but leaving a big part of your lives intertwined is probably not what you want to do.