By Ladd Hirsch
“Water, water, everywhere,
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink.”
The Rime of the Ancient Mariner, Samuel Taylor Coleridge, published 1798
This riveting poem by Coleridge relates the story of a sailor who is cursed for killing an albatross, which results in the ship’s crew nearly dying of thirst while they are surrounded by the great expanse of the ocean. While not nearly as dramatic as this scene from the poem, divorcing spouses who own substantial interests in successful private companies do commonly experience a similar dilemma. The couple’s interest in a private company may be a highly valued asset that is worth millions of dollars, but the spouses and the company lack the cash necessary to fund the purchase of the interest held by the selling spouse. In the Coleridge vein, there is value value everywhere, but no cash to pay for it. Without a creative solution in place, this lack of liquidity creates a significant problem for the divorcing couple in achieving a “just and right division” (as required by the Family Code) of what may be the most valuable asset in their marital estate.
A Road Less Traveled—Postponing Asset Division Can Pay Dividends
The conventional wisdom is that all marital assets must be divided at the time of divorce. But, when a liquidity problem exists in divorce cases that involve the ownership interest held in a substantial private company, the best solution for the couple in some situations may be to continue their joint ownership of the business for a period of time. This approach to the division of a marital asset can be termed a “phased buyout,” and this settlement structure provides the spouse who is acquiring the full ownership interest in the company (the buying spouse) with the time necessary to secure the capital required to purchase the other spouse’s interest in the business (the selling spouse).