This is the latest in my series discussing a recurring question: When a closely-held business is a valuable marital asset, how can its value be turned into cash? I’ve previously touched on two alternatives by which the spouse who will continue the business might buy out the departing spouse’s interest: (1) a modest down payment with a long installment note, or (2) a cash buyout, financed by a third party lender or investor.

Now we come to the most challenging alternative: If alternative #1 is rejected by the departing spouse and financing for alternative #2 is not available, will the business be sold and the net proceeds divided between the spouses? As Part 1 on that topic, this article will discuss some of the principal pros and cons of selling the company. Part 2 will discuss the challenges in attracting a buyer and closing a sale.

The most obvious argument for selling the company is the possibility of realizing a lump sum cash amount at the closing, which can be divided by the two spouses. For the departing spouse, this can create a “nest egg”, avoiding the substantial risk of a long-term installment note whose payment depends on continued business success under the remaining spouse’s management. For the other spouse, it may produce immediate wealth, with either a post-Closing employment agreement or fresh capital to start another business. For each of them, it can reduce their ongoing financial ties and the stress that creates.

However, there are some significant downsides for both spouses in this scenario. First, unlike alternatives #1 and #2, there will be capital gains tax on the sale, reducing the net proceeds to each spouse. Second, it is possible, even likely, that the buyer will not agree to a 100% lump sum payment at closing due to such common deal elements as: escrowing part of the purchase price to secure seller indemnifications; an installment note for some of the price; and/or a possible earn-out component based on post-closing sales or net profits. And, unless the spouse who has run the business receives long-term employment from the buyer, he or she will need to find or create new employment to fund living expenses and spousal/child support payments.

Given these substantial disadvantages, why would either spouse choose to sell (or force a sale of) the business? One possibility is that the departing spouse’s need for financial security leads to firmly rejecting a long-term installment buyout by the remaining spouse, with payments subject to the risks of bad management, industry changes or economic downturns. The remaining spouse may genuinely want to “cash out” and move on to something new, rather than struggle to increase profits sufficiently to make payments to the other spouse or a third party financing source. Or the time may simply be right to sell the business, whether because the business is peaking or due to industry or market conditions. For instance, at present (early 2015), the Mergers & Acquisitions market is very strong for sellers, with investment funds and strategic buyers competing for a limited pool of strong acquisition candidates, driving up prices.

In short, there will be situations where the closely-held business is sold in a division of marital assets, despite the economic factors that militate against that. If the business is to be sold, how is that done and what hurdles must be cleared to achieve a successful sale? Answers to those questions will be the subject of “Selling the Business-Part 2”, next month.