Running a family business takes grit, sacrifice and of course, years of dedication! For most individuals, it is not just a company- it is their legacy, their source of likelihood and something they hope to pass on to their children.
However, if your marriage is ending, that very business can become a source of financial and emotional distress and complexity. If you are navigating a divorce and family business, it is vital to understand your rights, responsibilities and options. Here is what you need to know.
- How Courts View Family Businesses
Here is one common misconception- just because a business is yours or has been in your family for generations; it does not automatically mean it is off-limits in the instance of a divorce.
When you are going through a divorce and family business is involved, the court does not treat it as a sacred entity. Rather, it is considered a marital asset, if it qualifies. If the business was started or significantly grown during your marriage, it is likely to be considered marital property. And that means it is on the table for division.
However, the court also considers various factors, which include whether the business was inherited, brought into marriage or managed by one spouse only. That said, even if you started the business before the marriage, if there is any appreciation in its value during the marriage period, it may still be subject to division.
Alternatively, if both spouses were actively involved in running the business- even informally- the case for shared ownership becomes stronger. And while judges generally prefer not to selling of a family business, they can order it. This can happen if there are few other assets to balance the financial scales.
- Valuing Business Assets
One of the main issues in dividing business assets in divorce is to figure out the actual worth of the business. Looking at your bank accounts or assets on paper is not enough- it usually requires a financial expert to assess both tangible as well as intangible factors.
There are two usually common methods for business valuation in divorce.
- Net asset valuation- This approach evaluates what the business owns – including equipment, real estate, inventory, while what the business owes is deducted.
- Earning- based valuation- This method looks at past and projected future earnings- often a multiplier is applied to assess the company’s possible profitability.
Fair warning- the process can get quite contentious. You may have one expert claiming your business is worth a certain amount while your ex-spouse’s expert says it is half worth that. In many cases, both parties agree to hire a single joint expert to make the process smooth and neutralize the valuation.
And here is an important detail- even if the business feels emotionally yours in the eyes of the law, its financial value is part of the bigger picture of your divorce financial planning.
- Options for Division
What happens once the business is valued?
There are many possible outcomes when handling family business ownership divorce scenarios and each has different implications for control and cash flow- all of which will eventually impact your peace of mind.
Outright or Deferred Sale
In some cases, the business may have to be sold- either right away or at a future date! A deferred sale may allow one spouse to continue running the company until an agreed upon event like the children finishing school or retirement. While selling the business may be necessary from the financial perspective, it can be distressing and disruptive for owners who were committed to long-term growth.
Share Transfer
Another option is transferring shares from one spouse to another. This may work well if both parties want to remain involved or if a buyout is not feasible financially. However, this method does not offer a clean break- and working beside your ex is easier said than done.
Offsetting
Offsetting is one of the most common approaches. It involves one spouse keeping the business in exchange for the other spouse getting different assets like cash, investments or real estate. This route can keep the business intact, but it does place more financial risk on the spouse who keeps the business- particularly if the other receives more liquid or stable assets.
Every case is unique and your personal priorities – like preserving a legacy or ensuring your financial independence should be factored in to make the decision. In such an instance, a complex divorce attorney can help you weigh these options strategically.
That said, every case is unique. Hence, your personal priorities, which could be ensuring your financial independence or preserving your legacy; should be considered to make the decision. An attorney may help you weigh your options strategically.
- Preventing Business Disputes in Divorce
If you are not currently in divorce proceedings but want to protect your business, there are some proactive steps that you can take right now.
Prenuptial and Postnuptial Agreements
These agreements can be quite helpful for protecting the family business ownership in divorce. A prenuptial outlines how assets including the business, will be treated in case the marriage ends. A postnuptial does the same, but it is drafted after the marriage has already taken place.
These agreements can be legally binding in the US and can be helpful in preventing bitter disputes later.
Partnership and Shareholder Agreements
If you co-own the business with other partners, formal agreements with divorce clauses can be drawn which prevent shares from being transferred without approval. This protects the business and helps keep the business stable and intact, regardless of personal changes in your life.
Pay Yourself a Competitive Salary
This may sound like basic advice, but it is quite significant. Many business owners tend to underpay themselves and reinvest mostly in the business. If you ever find yourself needing to prove income for spousal support, pay yourself fairly to prevent unnecessary pressure to liquidate or divide business assets.
Proactive divorce financial planning is not only wise, but essential too! The sooner you get your documentation in order and structure your finances, the better your position will be to protect what you have built.
- Endnote
Facing a divorce is never easy and where there is business involved, it can feel even more overwhelming. Your business may represent years or even generations of hard work and the thought of dividing or losing it can be quite unsettling. However, with the right planning, legal guidance and a clear understanding of your options, it is possible to steer through the process while protecting both your financial interest and your legacy.
If you are in the midst of a divorce or preparing for the future, taking proactive steps can be helpful. It is also important to consult with professionals who understand the nuances of family law and business structures and can guide you through this rather complex transition.
Your marriage may be ending but your life and your business can move forward with clarity, confidence and purpose.
