Divorce can result in significant consequences for a family business, for a variety of reasons. Family-owned businesses are very common in America – about 19% of all businesses are classified as family-owned – and many couples run them together. This reality can result in a very complicated divorce process, especially when it comes to the matter of dividing the value of a couple’s marital estate equitably.
Every situation is unique, and business owners need to know what options they have available to them before committing to any particular approach. Here are a few to consider if you co-own a business with your spouse and divorce is either a strong possibility or is imminent.
Some divorced couples continue to co-own and operate their business together, despite their divorce. This arrangement can be challenging and generally benefits from a clear operating agreement to address decision-making, financial contributions and exit strategies. But it’s important to note that a business doesn’t have to be sold and that a couple doesn’t have to be married to run their business together.
With that said, the new relationship needs to be well-defined. In some cases, divorcing spouses can agree to maintain their respective roles in the business without interfering in each other’s areas of responsibility. This approach may require strict boundaries and a formalized legal partnership agreement.
Setting up a buyout
If only one spouse wants to stay, they may effectively buy out the other’s share in the business. This often requires a valuation of the business to determine a fair price. The buying spouse may use personal funds, take out a loan or negotiate the loss of other assets to equalize the division of marital property. Instead of an immediate buyout, one spouse may agree to receive a portion of the business’s profits or assets over time, resulting in ongoing financial support.
Selling the business
Of course, a very common option is to put the business up for sale. When it sells, spouses can divide the proceeds. This can be a straightforward way to achieve a clean break, but it may not be the best option if the business is a significant source of income or has sentimental value. But it is often the easiest way to divide the value of the enterprise, especially if both people know they cannot imagine continuing to work together after a divorce.
Regardless of the tactic they choose, married business owners must understand how complicated the process of addressing a family business during divorce can be. By seeking legal guidance, they can receive personalized professional feedback concerning the approach(es) that may best serve their interests.