FAQs – Divorce & The Family Business
When a couple owns a family business, the divorce has to deal with the breakup of both the family and the business.
How is the business taken into account in a divorce?
If a couple starts a business while married, then the business is community property, even if only one spouse actually worked in the business. It is valued like any other kind of community property (house, investments, retirement benefits, etc.), which means figuring out what the business is worth (assets minus debts the business owes).
How is the business valued for divorce purposes?
Valuing the business usually requires hiring a CPA with expertise in divorce cases. In general, a business can be valued for different purposes, such as buying or selling it, probate cases, buying out a partner who retires or dies, or in a divorce situation. The bottom line number can be different depending on the reason why the business is being valued, and whether the business is being assessed as a “going concern” or in preparation for a sale. There are various methodologies used by the expert in coming up with the value. This is a complicated area of the law and requires an experienced CPA as well as a divorce lawyer. Business valuations are expensive. Depending on the size of the company, it can cost tens of thousands of dollars.
Who gets to keep the family business after we divorce?
The easiest and least expensive way to address this issue is for the spouses to agree on who will keep the business and to give the other spouse property of comparable value. However, if both spouses want to keep the business and force the other spouse out, then the judge has to decide which spouse is better able to continue to run the business in a way to maximize the benefit to the entire post-divorce family, i.e., generate the most income for child support and/or alimony, provide a legacy for the children, etc. If it isn’t clear that one spouse is better able to run the company than the other, the judge has the power to order the business sold and net proceeds allocated between the spouses. This is usually the least desirable outcome because now neither spouse has a job.
What happens if I can’t afford to buy out my ex’s share of the business?
If you want to keep the business, then you have to buy out your ex’s share of the business, either with cash or by giving up other property of similar value. Rarely is there enough cash to make a lump-sum payment, so you will be paying over time, with security or collateral provided to ensure your ex will eventually receive full payment. If that won’t work, then the business will likely be sold, if your ex insists on getting his / her share of the value of the business.
What if we both want to keep the business?
If you both want to keep the business and you agree to continue to run it together post-divorce, you can do this. The law does not require only one of you to keep it. A good operating agreement and buy-sell agreement will be essential to avoid future problems in how the business is run, what happens if one or both of you remarries, dies, or becomes disabled.