Tips to dissolve the business partnership with your spouse

Settling a divorce is a challenge. It's more difficult if your spouse is also your business partner. When you agree to part ways amicably, there are some things that you must do to make sure the business does not become a cause for disagreement.

Revisit Deeds

Company laws require at least two directors and two shareholders on board. Often, these are the spouse and other family members. Setting up the company would have required you to draw up an agreement specifying the equity and responsibilities of shareholders. This will be the basis of your claim on the business. Go through it to see who owns how much.

"Ideally, the divorce agreement should mention the rights of the parties after divorce. It may include terms pertaining to shareholding, goodwill and assets/liabilities and could be the first step towards seeking divorce by consent," says Gurmeet Singh Kainth, partner, DH Law Associates, a New Delhi-based law firm.

Business Drive

You may decide to continue business as usual in which case the existing agreement can stay. But if there is change in shareholding as part of the divorce settlement, the agreement has to be redrafted.

If the discord makes it impossible for the two of you to share a common workplace, one can either sell out or step down from active management while retaining the stake.

"One may become a sleeping partner and limit involvement in operations without giving up ownership and, thus, profits," says Kainth. However, giving up role in operations will not free you from business liabilities, unless there is an agreement to this effect.

You can minimise your legal liabilities against your business by restructuring. The limited liability partnership, or LLP, structure is suitable for those seeking to limit their liabilities to the investment made by them. "The liability of LLP partners is limited to the extent of their contribution, except in cases of intentional fraud or wrongful act of omission or commission," says Kainth.

If one of you is exiting, check the shareholding papers. Most partnership deeds or shareholders agreements incorporate conditions in which a partner's share may be bought by the other as well as the method of valuation of the business for this purpose. If your agreement does not have these things, you will have to arrive at the market value of the business.

Firm Valuation

If one of you is going to buy out the other, you will have to put a price tag to the company. The valuation will depend on the nature of the business and its main assets. For instance, a consultancy company will value its clients more than physical assets such as offices and equipment. In contrast, a retail company will put more value to its stores and other physical assets.

"A mutually acceptable way to value the partnership interest must be arrived at. Discord may arise over valuations and the partner going by emotions may want to sell his/her share for more than its fair value," says Kainth.

There are multiple ways to value a company, including income flow, assets and market valuation. "In case both spouses are actively involved in the business, multiple methods such as market multiples, transaction multiples and discounted cash flow methods can be used to value the company," says Divya Baweja, senior director, Deloitte India, a consultancy firm that also offers business valuation services. "If only one spouse is actively involved in the business and the other is expected to continue as a shareholder, the discounted cash flow method may be used if both agree to the business projections," he says.

Income-based valuation:
Land, buildings and equipment might not be the core asset of companies in the services sector. When intangibles such as goodwill and client base are the primary assets, it is better to rely on income flow.

Market-based valuation:
In this, the price-to-earning multiple (the ratio of the share price and earning per share), of comparable companies is taken as the base.

Asset-based valuation:
Capital-intensive companies can be valued on the basis of the market price of fixed assets and equipment along with its inventory. You will also have to add the owner's discretionary expenditure such as payments for car, club membership, entertainment and travel that he/she can avoid.