How A Family Business is Affected by Divorce

When a divorcing couple owns a family business, they face additional separation challenges. Find out what these challenges are and how to deal with them.

When a couple is contemplating a divorce, they need to know if and how this will affect the family business.

Getting a divorce normally becomes complicated as a couple attempts to work out custody issues and divide assets and liabilities as fairly as possible. These matters alone can bring on arguments and disputes. What if a family business is a part of this contentious mix? This business can be anything from a store to a professional medical office.

Is Family Business Marital Property – Yes or No

Typically, if a business began during the marriage, its assets and liabilities become part of the marital property. If a party owned the business before marriage, it is likely separate property.

Circumstances, however, are rarely straightforward. A prenuptial agreement can influence whether the family business is a marital asset, even if the business started during the marriage.

Family Business and Marital Funds

It would be rare indeed if a family business only affected one party. For example, the owner/spouse may use marital funds to improve or grow the business. That will likely turn it into a marital asset.

Or the business may have thrived because the non-owning spouse contributed time and effort to the business, i.e., worked there, helped out, kept the books, etc. This can also turn individual property into marital property. A court might need to decide the extent and amount of business ownership.

Inherited funds used to start a business during marriage add complexity. Normally, such inheritance and purchased property is an individual asset.This might also be the case if the owner of the business purchases it with savings accumulated prior to the marriage. 

Determine the Value of a Family Business

While trying to determine the ownership of a family business during the divorce process, it is equally important to know its actual value. This helps a couple – or a court – to split the business assets fairly. Single-party ownership of the family business can impact divorce issues like alimony and child support. A financial expert can help assess the business’s value by examining relevant documents.

If a couple must divide the family business, one option is a buyout. One party pays a lump sum to buy the other’s interest. Alternatively, they could trade other marital property for total business ownership.

Methods of Determining the Value of a Family Business

The business can be valued on its current and expected net income. If the business is to be liquidated, an asset valuation may be best. This involves determining the assets and subtracting the liabilities. The resultant amount is the value of the business.

A third method is a market-based method, which compares other, similar businesses that are being sold in a similar market. 

A financial expert will be a couple’s best guide when determining the value of a family business. Such an expert can get creative, such as suggesting another employee be hired. Such an addition can lower the hours the couple works and lessen the value of a business. If one partner foresees a future divorce, this can be one way of devaluing the company. 

Creating a Business Partnership

The marriage may have soured, but a couple can still decide to work the family business as a team – a divorced team. The no-longer-married couple should have a business partnership agreement drawn up that describes each partner’s responsibilities and role in the business. If the divorce is amicable, this may be a way for both parties to keep their share of the family business post-divorce.

Conclusion

When a couple divorces, a family business can complicate matters. The best solution is to have each partner represented by an experienced divorce attorney and financial expert to sort out the legal and financial issues and possible repercussions. 

The legal process can get difficult, which is why we always recommend that you seek the assistance of counsel; or at least have a consultation. Schedule a consultation with one of our attorneys today to review the issues of your case, the legal options you may have, and certain rights that pertain to your unique situation.

Have more questions? Let us know by sending an email to: questions@legallotus.legal and we will do our best to develop content to provide you with direction and insight!

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