A family business is often more than a source of income. It can represent years of effort by a business owner and other family members involved in the business. A person may have long-term plans to continue running their business and pass it down to future generations. When an owner of a family business gets divorced, their plans could be threatened, and they may be unsure what steps to take to address business ownership and other financial concerns.
Many of the key legal and financial concerns in a divorce may relate to a family business. Even if only one spouse has been actively involved in the daily operations of a business, divorce can raise questions about ownership, value, and control. The decisions made may affect the business and the people connected to it. A divorce attorney can provide guidance to business owners and their spouses on how to handle these issues.
When a Family Business May Be Considered Marital Property
One of the first issues to address in a divorce involving a family business is whether the business is considered marital property. All assets that a couple acquired during their marriage are generally considered to be marital property. Increases in value of a separately-owned business during a couple’s marriage may also be considered marital property. How ownership of a family business may be addressed will depend on several factors.
A business started while a couple was married will be classified as marital property, even if one spouse was involved in running it. In these cases, the business may need to be addressed when dividing marital property. This can apply to small, closely held businesses as well as larger family enterprises.
A business that existed before a couple got married may still be affected by a divorce. While the original value of the business may be considered separate property, any increase in value during the marriage can sometimes be treated as marital property. If marital funds were invested in the business, or if both spouses contributed labor or other efforts to help it grow, the non-business-owner spouse may have a claim to some of the business’s value.
In family-owned businesses that are passed down through generations, ownership structures can add another layer of complexity. Even if a spouse is not listed as an owner, their indirect contributions may be considered when determining whether part of the business may be considered marital property.
Ways a Family Business May Be Divided During a Divorce
Once a family business is determined to be marital property, the next question is how it may be addressed when dividing marital property. Courts and divorcing couples often seek solutions that are fair while minimizing disruption to the business. Options may include:
One Spouse Keeps the Business
One spouse may retain full ownership and control of the business. In exchange, the other spouse may receive different marital assets of a similar value, such as real estate, retirement accounts, or other investments. This approach can help preserve the business’s continuity and may be the preferred option when one spouse has been actively involved in business operations.
Buyout of the Other Spouse’s Interest
In some situations, a spouse who wishes to maintain sole ownership of a business may buy out the other spouse’s share. This may be done through a lump-sum payment or through structured payments over time. A buyout may allow the business to remain intact while still addressing the financial interests of both parties.
Continued Co-Ownership
Some divorcing couples may choose to continue co-owning a family business after getting divorced. This may be the preferred solution if both parties have been closely involved in the business or have served as equal partners during their marriage. This arrangement will require a high level of cooperation, and clear agreements will need to be established to ensure that both parties fully understand their roles in the business, decision-making procedures, profit distributions, and future buyout options.
Sale of the Business
If necessary, a business may be sold, and the proceeds may be divided between the spouses. This option may be considered when neither spouse can afford a buyout or when continued operation of the business is not practical. While a sale can provide a clean financial break, it will also mean letting go of future plans for a family business.
Business Valuation Methods Used During Divorce
Determining the value of a family business is a critical part of dividing marital property. Business valuations are not always straightforward, especially in situations involving closely held or family-run companies. Accountants and business valuation experts may need to be brought in to perform an analysis. Some of the methods used to determine the value of a business include:
Income-Based Valuation
This approach focuses on the business’s ability to generate earnings. Financial experts may look at past and current income and project future earnings to estimate value.
Asset-Based Valuation
This approach examines the business’s tangible and intangible assets, such as equipment, inventory, real estate, and intellectual property. The total value of assets will be determined, and any liabilities will be subtracted.
Market-Based Valuation
This approach compares a business to similar businesses that have recently been sold. While this can be useful, it may be harder to apply to unique family businesses that lack close comparisons in the local market.
Steps That May Help Protect a Family Business
While spouses usually will not enter a marriage expecting it to end, planning ahead can reduce uncertainty and conflict if a divorce does occur. There are several steps that may help protect a family business from significant disruption, including:
Prenuptial Agreements
Before getting married, a couple can create a legal agreement outlining how a family business will be handled if the marriage ends. This may include specifying that the business will be separate property owned solely by one spouse. An agreement may also address how any increase in the business’s value will be handled. In family-owned businesses, prenuptial agreements are often used to help preserve family ownership.
Postnuptial Agreements
These agreements serve a similar purpose as prenuptial agreements, but they are created after a couple’s marriage has begun. An agreement can address changes in circumstances that take place during a marriage, such as starting a new business or joining a family enterprise. Like prenuptial agreements, postnuptial agreements can clarify expectations and reduce disputes later on.
Clear Record-Keeping
Maintaining the financial records can help distinguish between personal and business finances. Separating accounts, documenting investments, and keeping detailed records of contributions may make it easier to identify what portion of a business is marital property or separate property.
Defined Ownership and Governance Structures
Formal ownership agreements, operating agreements, or shareholder agreements can help clarify who owns what portion of a business and how decisions are made. These documents can be especially helpful in family businesses with multiple relatives involved, as they may limit the impact of one owner’s divorce on the rest of the company.
Legal Help With Business Valuation and Division
A divorce can affect a family business in many ways. Employees, extended family members, and long-term business plans may all be influenced by how a couple’s divorce is handled. For business owners and their spouses, legal assistance from a divorce attorney experienced in complex property division issues can help ensure all legal and financial concerns are handled correctly.
Disclaimer: The content provided in this article is for general informational purposes only and is not intended as legal advice. Each divorce and family business situation is unique, and the legal aspects may vary depending on individual circumstances. It is highly recommended to consult with a qualified attorney who can offer personalized advice and guidance based on your specific case.
