30 Sep 23

How Divorce Affects Partners in a Family Business

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Last Updated on: 4th October 2023, 07:20 am


How Divorce Affects Partners in a Family Business

Getting divorced is hard enuf on its own. But when you add in the complication of owning a family business together, it can get real messy real fast. This article looks at some of the common challenges and legal issues that come up when a married couple that owns a biz together decides to split up.

First off, it’s important to understand that in most states, any business started during the marriage is considered a shared asset, even if only one spouse is actually involved in running it day to day. That means if you and your soon-to-be-ex opened a bakery together 10 years ago, the court is gonna see it as joint property that needs to be divided up somehow as part of the divorce settlement.

This can get super complicated when the business is closely tied to one spouse’s identity and livelihood. Let’s say the wife is the baker who handles all the daily operations, while the husband does the books and marketing. She’s gonna feel a lot more attached to the bakery than he is. So she may fight hard to keep it as part of her settlement, while he just wants his fair share of assets.

On the other hand, the husband could argue that he’s entitled to some ownership or profits even though he’s not actively involved. After all, he helped get the business up and running in the first place. So you can see how things can get contentious real fast. Both spouses are likely to feel they have a legitimate claim.

Valuing the Business

Before any assets can be divided, the business needs to be valued. This is so the court can figure out each spouse’s share. Valuing a private business, especially a small or midsize one, is tricky. There are different methods, like looking at revenue, assets, or profitability. But the numbers can be open to interpretation.

Each spouse will want the valuation to come in as low or high as possible, depending on their goals. The wife may argue the bakery is barely getting by, while the husband says it’s raking in dough. They’ll each hire their own forensic accountants and business valuation experts to make their case.

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If the spouses can’t agree on a valuation, the court may appoint a neutral expert to do an independent assessment. But that’s an added expense that eats into the value of the business.

Dividing the Business

Once the value is set, the court has to decide who gets what. There are a few common approaches:

  • Sell the business and split proceeds
  • Split ownership between spouses
  • One spouse buys the other’s share

Selling the business to an outside party is clean and simple. But it can be emotionally tough, especially if the business is a big part of one spouse’s identity. And finding a buyer can take time.

Splitting ownership may seem fair on paper. But now you’ve got ex-spouses who hate each other co-owning a company. That’s usually a recipe for nonstop fights and lawsuits. Probably not gonna be good for business.

Having one spouse buy out the other’s share works if the business is profitable enough to support the payout. But the buyout terms could still be disputed. And the selling spouse may feel cheated.

As you can see, each option has pros and cons. There’s usually no perfect solution that makes everybody happy. The court will look at factors like each spouse’s role, income needs, and emotional attachment to the business. But compromise is key.

Impact on Operations

The divorce process itself can take a major toll on the business. The owners are stressed and distracted dealing with lawyers and court dates. Employees may feel anxious about the company’s future. Suppliers and vendors may be wary of working with you.

Once the settlement is finalized, the dust can take a while to settle. If ownershp is split, the ex-spouses need to figure out how to work together in their new roles. Emotions may still run high for awhile.

An amicable divorce is ideal if you want to preserve the business. Some couples are able to separate personally but still work together effectively as business partners. But this takes maturity, patience and good communication skills.

It may help to start the legal process with mediation rather than litigation. A mediator can guide you to compromise instead of a courtroom battle. You’re more likely to reach a resolution you both can accept.

If one spouse ends up buying the other out, the remaining owner may struggle at first to run things solo. But now they have the freedom to make decisions without constant fights.

Over time, the business can thrive again once the uncertainty of divorce is in the rearview mirror. But the owners need to take proactive steps to stabilize operations during this turbulent transition.

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Tax Consequences

The financial implications of dividing or selling a business as part of divorce are complicated. Here are some key tax issues to keep in mind:

  • Transferring part or all of a business to a spouse may trigger capital gains taxes.
  • The spouse keeping the business may face higher payroll and income taxes.
  • Proceeds from selling the business would likely be taxed at the capital gains rate.
  • Each spouse’s share of business profits may change their tax liability.
  • A lump sum buyout payment could push the recipient into a higher tax bracket.

So it’s critical to think through the tax impacts of any settlement, with help from your financial and legal advisors. The last thing you want is a big surprise tax bill down the road.

Planning Ahead

If you’re starting a business now with your spouse or partner, take steps upfront to define each person’s role and ownership stake. This can help avoid conflicts later if you split up.

A shareholders agreement or partnership agreement clarifies everything in writing – who contributes what, who owns what percentage, what happens if you divorce, etc.

Also consider a prenuptial or postnuptial agreement that spells out in advance how a business will be divided in case of divorce. This gives you more control over the outcome.

Of course no one gets married expecting to get divorced. But hoping for the best while planning for the worst can save you headaches down the road. Protecting the business you built together is just smart.

Splitting up is never fun or easy, especially with a shared business in the mix. But understanding the legal, financial, tax, and operational implications can help you make the best of a difficult situation while positioning the business for future success. This too shall pass!