Spouses who own a small business together often decide that one spouse will transfer their ownership interest to the other spouse to make clean break, but what if the purchasing spouse lacks the funds to buy the other spouse out?
When there are insufficient funds available for the one spouse to purchase the other spouse’s interest in a jointly owned business in a divorce, there are a number financial strategies to consider:
Delaying the purchase for a defined period of time while one spouse continues to operate the business is one strategy. In other words the spouse who wishes to keep the business receives an option to purchase the business at 1, 2 or more years in the future. If the operator spouse fails to purchase the non-operators interest at the agreed time, the spouses can either agree to extend the agreement, or sell the business and divide the proceeds.
- If the couples decide on the put/call (delayed purchase) option it is important that the business is not valued at the time of the divorce, but rather at the point at which they agree to exercise the option, AND, that a couple adopts a specific, detailed valuation formula in advance so there are no shenanigans when the option is exercised in the future.
- The spouse operating the business should provide full transparency, issuing regular financial reports to the non-operating spouse regarding the business, which may include periodic audits of the business by a third party to protect the spouse selling their interest in the business.
- A non-operating spouse should also maintain some level of control by retaining veto rights regarding the operation of the business during the put/call period. This ensures the business remains the basically the same, that any big changes to the structure such as changes in personnel, spending, or ownership have to be approved by the non-operating spouse.
The option to buy the business at a future date can alleviate conflict during the divorce, while providing the purchasing spouse enough time to raise the funds necessary to purchase the ex-spouse’s ownership interest, but certainly other options may include finding another investor, securing a loan, or even selling part of the business to raise funds.
Many are relieved to note that dividing a business in a divorce is considered incident to the marriage and is not deemed a taxable event, even if it takes a few years to work out the details of the transfer of ownership. However, it cannot be overstated that it is important to work with an experienced marital property division lawyer to ensure the transaction is properly executed to ensure both the transferor and transferee are legally and financially protected .
When you have questions regarding the transfer of ownership interest in a small business in an Iowa divorce, contact the Des Moines family law attorneys at Stoltze & Stoltze PLC for assistance today at 515-244-1473.