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The fate of a business when couples divorce

On Behalf of | Jan 20, 2021 | Family Law |

No matter how you look at it, a divorce that involves a business makes settlement or trials much more complex. Add to this that sometimes people resort to tactics to harm the other spouse. If the business is made a party to the divorce proceedings, extra legal fees are involved.  Bad publicity can ensue through disparaging remarks whether in or out of court…which harms the earnings capacity and value of the business.

Generally, if the business was launched during the marriage, the business is considered marital property. But the business is probably more valuable in the hands of the person who spends the most time operating it. Likewise, if the business is profitable, the surrendering spouse may actually achieve more value through higher maintenance payments.  While multifaceted, there are work-outs available to create the best result given divergent interests. Achieving this understanding early will help circumvent damage to the business.

Complexities and decisions

If you are a business owner going through divorce, you want to protect the intrinsic value of the business. Few judges will allow divorced couples to both own a non-publically traded enterprise. Either a sale will be commanded or one spouse will be awarded the company with the other spouse being granted other assets, a money judgment, or higher maintenance payments. Therefore, among the things one must understand is that the fair market value of the company as well as its future income and cash flow potential. All crucial facts that come into play. Through a business valuation/appraisal, each party will learn just what the business is worth, which is critical in divorce negotiations. The business may be the asset with the largest value and influence in a settlement or judgment.

In addition to these economic facts, other considerations receive scrutiny during a divorce involving a business because complexities abound. Other factors considered include when the marriage took place and when the business began; the financial investments that each spouse made in the business; and a variety of aspects such as the dedication and amount of time either spouse participated in the business.

Here is an article that addresses potential scenarios as to what may happen to your business as the result of a divorce, as well as possible preventative measures to put into service.

Some scenarios:

  • If it is a realistic option, the two former spouses could remain business partners as long as they understand their specific roles and can bury the hatchet. This option is not recommended for couples who will not get along, and why courts are reluctant to approve such a settlement. Employing this resolution makes a shareholder agreement imperative. One that permits either former spouse to buy out the other at a fixed amount if things go sideways.
  • In the alternative, one spouse could buyout the other spouse’s share of the business. This may implicate the need for a business loan, or to seek out investors to secure capital or even recruit another business partner.
  • Sometimes, selling the business is the most practical option. Following a divorce the ex-spouse may no longer have the urge or the stamina to run the business. A business sale allows the spouses to sell the asset, split proceeds and make a clean break from marriage. Plus, an entrepreneur at heart is provided the opportunity to pursue new ideas.

For business owners going through divorce, protecting the business is a priority. Options require careful deliberation and proper presentation to the other spouse. Given the complexities, “the devil is in the details.”