What Happens to the Family Business After a Divorce & How Do You Protect Your Interests?

June 06, 2022Family Business, Insights

Disturbances that can come from personal issues like a divorce can also create controversies within a business. These issues create stressful environments for all parties involved, and they can also add stress to the business. As a family business owner, if you and your business partners have a quality buy-sell agreement that outlines what to do in the case of a divorce, the stress on the business itself can be relieved.

A buy-sell agreement, which is sometimes also referred to as a buyout agreement, is an agreement between two or more co-owners of a business that explains what needs to be done when a divorce, death, or other major factor forces an owner to leave the business.

There is value in creating a buy-sell agreement in advance of a business venture or at the early stages of the business venture. Deciding the buy-sell terms in case of divorce can be much easier when the business is still in the early stages. Without the emotional baggage that can come from years of owning a business, the owners can easily plan for an agreement that works to represent the company’s interests.

If there is no buy-sell agreement and the divorcing couple cannot agree on how the division of the business should proceed, a spouse can take a couple of routes to move forward.


Three Steps To Protect Your Interest In A Family Business

  • Planning For The Future

Often at the beginning of a marriage, the subject of divorce is not something that either party likes to think about. While this is understandable, there is value that can come from having a plan for the future at the beginning of a marriage; this is why prenuptial agreements are becoming more and more common. Aside from a prenuptial agreement, other agreements like shareholder agreements and the aforementioned buy-sell agreement are tools that can be used to help the split of the business equity during divorce proceedings.

  • Hiring A Family Law Attorney

As a co-owning spouse, if you feel that you are exploring the possibility of filing for a divorce, it is crucial to meet with a family law firm or multiple attorneys and hire someone skilled to represent your ownership interest. An experienced attorney or family law firm can aid in the stressful situations that are likely to arise and ensure that you are getting your fair share of either the business or other equally essential marital assets.

  • Receiving Expert Opinions

In addition to hiring a skilled attorney, seeking out expert opinions about aspects of the business from other professionals can be helpful. For example, you may need the opinions of CPAs, certified valuation analysts, and other business valuation experts to gain a fair market value of the business or predict expected cash flow. Most of the time, your attorney will have access to a network of helpful experts.


How We Can Help Protect Your Interests

The Exit Consulting Group works with our clients in all types of business situations. We can help facilitate the creation of buy-sell agreements with your attorney and ensure the business and its co-owners are represented fairly in the circumstances of a divorce. If you don’t have a buy-sell agreement or your spouse is one of your business partners, we can mediate internal negotiations about what happens with the business shares. If your spouse is also your business partner, it may be beneficial to do a business valuation and develop a buyout plan at that time, assuming one of the spouses wants out of the business. If both spouses are business owners and neither wants out, we can help negotiate business agreements and terms and job descriptions and responsibilities for running the business post-divorce.


Providing Solutions That Get Results

Challenge Example:

A woman goes through a challenging time in her marriage and later decides it is in her best interests to divorce her husband, with whom she co-owns a business. Together they look at the absolute value of the business. The business shares are now on the negotiating table, both in value and in control. The soon-to-be ex-husband sees the business’s success and wants 50% of the wife’s shares in the divorce. As the marriage begins to dissolve, the mother’s children realize they will soon have their ex-stepfather as a 12.5% owner of the business.

Solution Example:

To prevent that scenario, the children decide to produce a buy-sell agreement. We bring the mother, stepfather, and children together and outline this new buy-sell agreement.

Result Example:

Typically, upon divorce with a buy-sell agreement, the spouses would be forced to give up their business shares to the remaining shareholders. They would be able to include the dollar value of the shares in the settlement. This would mean that the soon-to-be ex-husband/non-owner spouse would be able to get the house, investments, or the boat, but not the business shares. With the new agreement, the business shares stay with the active business owners.



Is A Family Business Considered An Asset In Divorce?

When a divorce occurs, a family-owned business would be seen as an asset. State laws on business assets are often the decision-making factors as to whether or not the family business will be divided or how it will be divided. There are other factors at play as well, such as prenuptial agreements.

How Is A Business Valued During A Divorce?

The income generated by the business is one of the most consistently utilized methods for valuing businesses during divorce cases. With the income approach, there is an appraiser whose job is to determine the value of the business using information like the business’s current worth. A business’s current worth can be calculated by using the current value and the value the business is predicted to generate in the coming years.

Is A Family Business Considered Marital Property Or Separate Property?

Typically, a family business would only be considered marital property and not considered separate property if that business was either created or acquired during the years of the marriage. If the family business was created or acquired outside of the years of the marriage, it is often not considered marital property and would typically be considered separate property. It is important to note that every state divorce process is different, though. In order to best understand your specific situation, be sure to consult an attorney.