In a divorce where one spouse owns a business, a question often arises: Will I be forced to sell it? Perhaps unsatisfactorily for the person who has poured their blood, sweat, and tears into this particular endeavor, the answer to this question is “maybe.” In the Bay Area, numerous spouses who have poured their heart and soul into a startup are going through divorces and become worried that the court will force its sale. Here’s what you need to know about a forced business sale in divorce and how to protect your best interests (whether keeping the business or requesting its sale).
Forced Business Sale in Divorce: When Does It Happen?
When two spouses divorce, the courts deem anything they have built together during the marriage to be community property. In California, anything deemed community property is subject to a 50-50 split.
When the court considers an asset to be community property, the court has a few options to achieve that 50-50 split.
The first and often most preferable option is for the other spouse to “buy out” the other spouse’s interest. Think of this as a trade. Instead of selling the marital home, one spouse may live in that house and give the other spouse the entirety of the 401k balance to offset their 50% interest in the home. Buyouts also often happen with cars. Perhaps one spouse used one of the vehicles more. In that case, they may offset the other spouse’s 50% interest in the car by letting them take more money in the bank.
Another option is to “buy out” the other spouse but with deferred income. Perhaps you cannot buy out the spouse right now, but you could give them a portion of the revenue from the business. For example, instead of buying them out for $500,000 now, you give them $100,000 per year for six years – resulting in them getting more money in exchange for letting you keep and retain control of the company.
If there are no trades to make and no deferred income options available, the court sometimes has to order the business sold. This option is often not the most preferred choice, but ultimately, both parties are entitled to 50% of the asset in question. If they cannot agree on an alternative, that’s the only surefire way to guarantee they both get their fair share.
Avoiding This Fate for Your Business
Often, businesses mean more than just some numbers on a page – they come to fruition through a tremendous amount of effort, time, and money. They’re also often near and dear to one or both of the spouses’ hearts.
The best way to avoid needing to sell the business is to get a thorough business valuation, document all associated history (to see if it is genuinely 100% community property or some of it could be your separate property), and negotiate strategically with your soon-to-be-ex spouse. In other words, figure out what is truly at stake in the divorce process and leverage negotiations as much as possible to find a mutually beneficial solution.
An Experienced Attorney Will Help
If you want to avoid having a forced business sale in divorce, we can help! Please get in touch with us at (408) 560-4487 or complete our secure online form to schedule a case evaluation with one of our skilled high-asset divorce attorneys. We’ll advocate for you to help you preserve your business and your legacy.
