What Should I Know About Divorce And The Family Business?

What Should I Know About Divorce And The Family Business?

In a divorce, businesses are treated just like any other asset. Depending on whether the business is community property, separate property, or both, there can be many ways to divide it.

If the business was inherited or owned before marriage, the business could be a mixture of community and separate property. The following only concerns community-property business.

For a community property business, you can sell the business and split the proceeds. Though businesses are generally not sold during a divorce because selling the business is difficult and leaves one or both spouses without work, it does solve the problem of have the business appraised.

The divorcing spouses can also continue operating the business together or divide the business. In general, former spouses cannot work together, but economic realities may keep them together. If a business has more than one location, the divorcing spouses can work in different parts of the business and operate them independently. However, even if the business is a restaurant with more than one location, it is unlikely that all the locations have the same value. Furthermore, the divorcing spouses might find themselves competing for the same clientle. Issues such as who owns the business name, images, and logos, who hires employees, and how to maintain quality in two separate venues must be taken care of. Because most businesses are not set up to handle a division such as this, the business will likely be awarded to the spouse most capable of running it.

In many divorces, one spouse will be given the business. Subsequently, he or she will be ordered to pay the other for his or her community share in the business. The business’ value must be acceptable to or decided by a court. The value can be fair market value if there is evidence of that value, but the legal value of the business will probably be used. As far as legal value is concerned, it does not matter whether the business can sell or for what prices similar businesses have sold. Without a contract, the value of your business will be based on opinions of accountants and appraisers. The legal value could be established using the investment value of the business or another, court-approved method.

There is case law that supports “buy-sell” arrangements in finding the value of a business during divorce, but any agreement reached is surmised to be made with undue influence and can be voided. For a “buy-sell” agreement to be binding, the divorcing spouses must both be represented by independent counsel negotiations.

Once the value of the business is determined, each spouse must be compensated with assets of equal value by payment in cash and/or a promissory note.

The fight over a business’ value can be quite expensive. Couples seeking a divorce should explore methods of resolution that will lessen the costs as much as possible. Retaining one appraiser with the option to bring in your own experts if you disagree with the results is one way to cut costs. Couples may save money and preserve their working relationships by employing mediators to help resolve issues. Parties should consult with an attorney before finalizing a mediated agreement, however.

There is a method called “collaborative divorce” in which divorcing spouses work together and with their attorneys, accountants, and “coaches” to come to agreements in their divorce in a cooperative manner.

Before a couple decides to divorce, they should consider the consequences and all issues that will have to be resolved. The break up of the family and the business may take years to sort itself out.

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