Untangling the Knot: Navigating Your Business Sale During Divorce

Andrea Bousaid is a M&A Business Broker and Franchise Owner at First Choice Business Brokers Orlando Metro.

Unfortunately, divorce is a reality that drives the sale of many businesses. Over the years, numerous clients have approached us with a pressing question: Is it better to sell a business before or after a divorce? 

The intersection of personal relationships and professional commitments can create a turbulent time, leading to difficult decisions about the future of jointly-owned assets. It's a period marked by emotional strain and the daunting task of untangling shared lives, which often includes the fate of a business.

As business advisors, we've seen firsthand how divorce can reshape the landscape of one's personal and financial affairs. The division of assets is rarely straightforward, and when a business is part of the marital estate, the complexity only intensifies. Whether to liquidate the company before finalizing the divorce or navigate ownership post-separation is a multifaceted dilemma that demands careful consideration of the legal and financial repercussions and emotional ramifications.

In this article, we will explore the complex process of selling a business during a divorce. We know it's a tough decision, so we want to help you out. We're going to analyze the benefits and difficulties of both options and hopefully provide some clarity to those facing this situation. Our goal is to provide valuable insights based on our extensive experience so that you can determine which path is best for you in these challenging circumstances.

Selling a Business Before Divorce

Pros:

• Simplifies Asset Division: Selling a business before a divorce can simplify the process of asset division. According to a study by the American Academy of Matrimonial Lawyers, over 60% of divorce attorneys noted increased business asset disputes, highlighting the complexity of dividing such assets in divorce proceedings. The proceeds from the sale can be more straightforward to divide than the business itself, especially if the business valuation needs to be simplified or contentious.
• Provides Liquidity: Divorce proceedings can be expensive. A report by Nolo.com indicates that the average cost of a divorce in the United States can exceed $15,000 per person, with costs significantly higher in cases involving contested assets such as businesses. Selling the business beforehand can provide both parties with liquidity, help cover legal fees and settlement amounts, and facilitate a fresh start.
• Reduces Conflict: Converting the business into cash can reduce potential conflict over who controls or manages the business post-divorce, thus avoiding prolonged legal battles. An Institute for Divorce Financial Analysts survey found that business ownership disputes rank among the top five sources of conflict in divorces.

Cons:

• Timing and Market Conditions: The need to sell quickly due to divorce proceedings might not align with market conditions, potentially resulting in a sale price that does not reflect the actual value of the business. Market volatility can significantly impact small to medium-sized enterprises, with data from BizBuySell indicating that market conditions can alter business sale prices by up to 20%.
• Tax Implications: The business sale might incur significant capital gains taxes, reducing the net proceeds available for division. According to the IRS, capital gains tax rates can range from 0% to 20%, depending on the seller's income level and the duration of business ownership.
• Emotional Toll: For entrepreneurs, selling a business can be emotionally challenging, compounded by the stresses of divorce. A study published in the Journal of Family Issues found that entrepreneurs often experience a profound sense of loss and identity crisis when forced to sell their businesses due to divorce.

Selling a Business After Divorce

Pros:

• Retaining Business Value: Post-divorce, there might be more flexibility to sell the business at a reasonable time, maximizing its value without the pressures of impending divorce proceedings. The ability to wait for favorable market conditions can result in a significantly higher sale price.
• Individual Control: After the divorce, each party might have more autonomy over their share of the business or the proceeds from its eventual sale, allowing for more personalized financial planning. This autonomy can be crucial for long-term economic stability and growth.
• Potential for Increased Value: If the business grows in value post-divorce, the selling party may benefit from this appreciation, assuming they can retain ownership or a significant share post-divorce. The growth potential of businesses, particularly in emerging markets, can be substantial.

Cons:

• Complex Negotiations: Determining each party's share of the business and its value can be contentious, requiring detailed agreements that anticipate future sale conditions, which can complicate divorce proceedings. Legal experts from the American Bar Association emphasize the importance of clear agreements to avoid future disputes.
• Ongoing Ties: Maintaining joint ownership until after the divorce means the ex-spouses will have ongoing financial ties, which can be

Which One is Better? The decision on whether to sell a business before or after a divorce depends on numerous factors, including the nature of the business, the relationship between the spouses, financial needs, tax considerations, and the advice of legal and financial professionals.

For a Clean Break: Selling before the divorce may be preferable for those seeking a clean break, allowing both parties to liquidate their shared assets and divide the proceeds as part of the divorce settlement.

To Maximize Value: If the primary goal is to maximize the value of the business, waiting until after the divorce, when the owners can choose a more opportune time to sell, might be the better option. Regardless of the timing, engaging with financial advisors, divorce attorneys, and business valuation experts is crucial to navigating the complexities of selling a business in the context of a divorce.

Each situation is unique, and professional guidance can help mitigate risks and maximize outcomes for both parties involved.