Understanding the Legal Implications of Divorce on a Family Business

Divorce is a complicated process. Having a family business involved makes matters even more complex.

Family businesses that were started before marriage are typically considered separate property. However, if they increase in value during the marriage, this may require consideration of a marital property distribution.

A formal valuation of the company will determine its appraised value. There are several options based on the circumstances.

Business Assets and Liabilities: Marital or Separate?

When a couple divorces, they must decide how to divide their assets. If they own a family business, the process can become complicated. Depending on the circumstances of their marriage and how the business is set up, they may have to hire a forensic accountant or have an independent expert appraiser determine the value of the company’s interest.

Whether the business is separate or marital property will also impact how it’s divided during divorce. If one spouse owned the business before the marriage but grew significantly in value during the marriage, this increase could be subject to equitable distribution laws.

Alternatively, the separating spouses might agree to buy out the other’s interest in the business. This requires an agreement on valuation, which typically involves trading shares of other marital assets for the company’s interest. However, this is only sometimes possible as the business may need more liquid assets to pay for a full buyout. For this reason, it’s often a good idea for the separating spouses to have a formal purchase and sale agreement.

Valuation Issues

Family businesses often have unique valuation issues. For example, management compensation usually includes base salary, incentive bonuses, and life insurance premiums for executives. When valuing the company, These expenses must be eliminated from maintainable net earnings/discretionary net cash flows. Additionally, family business valuators frequently have to adjust for the need for more public reporting, making it difficult to compare like companies.

Often, one spouse will have a more significant stake in the business than the other. This can cause friction if the separating couple is not on good terms. However, if the couple can find common ground, it is possible to trade other assets in exchange for the appraised value of the family business.

If a couple cannot agree, the court will decide how to divide the business. There are better outcomes than this. A divorce lawyer at Sisemore Law Firm can help separating spouses find an acceptable solution through the collaborative process. In this alternative dispute resolution method, the parties can work with their attorneys to create a business solution that will satisfy both.

Buyout Options

The most straightforward way for spouses to divorce without impacting the family business is for them to sell it. Providing there is a willing buyer to pay fair market value allows both spouses to step away from the company while being compensated fairly for their ownership share.

This approach can cause a lot of disruption to the company as court appearances and discussions with forensic accountants and business appraisers pull employees and managers away from administrative responsibilities. But if a couple cannot agree on the value of the business, this may be the only way to settle their marital dispute and protect the interests of all parties involved.

Some shareholders will set up buy-sell agreements, which allow other stockholders to purchase a deceased or selling shareholder’s shares at a predetermined price. Depending on the circumstances, this strategy could allow family members to stay active in the business even after a divorce. However, this option will not prevent future disputes if a family member wants to make retaliatory changes to the company.

Buyback Options

For those who decide to continue to run the company after divorce, it may be possible for one spouse to buy out the other. This can be accomplished through a property settlement or a debt agreement allowing the owner to pay off the departing spouse over time. Transfers of this nature are usually tax deductible.

Suppose the spouse acquiring the company’s shares needs cash to buy out the other spouse immediately. In that case, it may be possible to trade other assets of value, such as vacation properties or art collections. This can help avoid the need to sell shares in a market downturn and provide additional tax benefits.

Mixing business and marriage can be challenging, but this is particularly true for family-owned businesses. A bit of pragmatism and planning can make all the difference in whether the company can weather a divorce and emerge more vital than ever. This is important for the owners, their families, customers, investors, and employees.

Selling Options

Family-owned businesses are often the cornerstone of a community’s economy. Although these businesses are very successful, they are not without problems and issues. One such issue is that of separation and divorce.

As a result, business owners need an exit strategy that includes buying and selling their family business shares. Generally, for those business owners who wish to leave their business, selling the shares to an outside buyer is an attractive option as it allows them to exit with an excellent return and continued income.

Alternatively, many business owners gift their shares to family members and key employees. This option is desirable because it gives the family business owner flexibility and buy-in from the new owner(s) and eliminates tax ramifications.

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