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How do I protect my business during a divorce?

On Behalf of | Apr 8, 2022 | Divorce

Business owners in Alabama know how to take care of their business interests to ensure that they remain viable in a competitive market. When it comes to divorce, the family business is often the largest asset on the table, so it is crucial to have safeguards in place so that all is not lost during the divorce proceeding.

When one spouse is the owner, partner, or shareholder in a closely held business, anticipating potential entanglements and being able to address them is important when preserving business interests after the divorce is final. Business owners in Montgomery and surrounding areas can benefit from an unbiased assessment of their overall financial risk so that they can effectively prioritize any concerns that come up during the divorce.

How does property division affect the business?

Alabama is an equitable division state, meaning that in a divorce, all assets acquired during the marriage are subject to equitable division, which is what the judge considers to be fair but not necessarily equal. This can include:

  • Property such as the family home, cars, real property.
  • Profit and any increased market value from the business.
  • Dividends, pensions and retirement benefits.

The other spouse may have a stake in the business if they contributed financially or otherwise during the marriage. The type of business structure can also place the business at higher risk during a divorce. For example, a sole proprietorship will be subject to equal distribution, but a limited liability company may have some protections in place.

A prenuptial agreement outlining the limits to how property division will affect the business in a divorce can protect it from the beginning. A postnup can also serve this purpose.

Which business evaluation is most advantageous?

During the divorce proceeding, one or both spouses may want to have an evaluation of all assets, which will include a business evaluation. There are basically three approaches to valuing a business that may come up with greatly different results, so choosing the right one for your situation is important:

  • Assets against liabilities. A simple valuation that can become unexpectedly complicated when it comes to assessing the value of office equipment, inventory, computers, or a car used for the business, it is an approach often used for small businesses.
  • Market-based analysis. This valuation gathers data on similarly sized businesses recently sold, and may not be the best approach for companies with a unique niche.
  • Revenue-based valuation. Most commonly used, this approach looks at past and projected cash flow and profits, including proceeds from investments.

It is important to note that the choice and timing of the valuation and structure of the business can affect the outcome of the proceeding.

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