Family-Owned Business Issues Following Divorce

October 5, 2015

family-owned business issues following divorceMany businesspersons are so focused on growing their businesses that they do not consider the potential consequences of divorce.  Whether the co-founders divorce each other, or one of the founders gets divorced, if the possibility of divorce is not acknowledged and planned for properly, the business can suffer terrible consequences.  There can be serious family-owned business issues following divorce, which, if you plan for them, can be eliminated.
Why planning for divorce is important
I bet if you were told by a professional advisor that the transaction you were about to enter into resulted in a complete loss of business assets 50% of the time, you would undoubtedly insist on putting the deal in writing.  Why?  To protect yourself against this significant business risk.  Although the statistics show that 50% or all marriages end in divorce, married business owners rarely create a plan that addresses divorce or separation.  Considering the potential harm that divorce can do to a business, it is surprising to me how often business owners are unprepared.
Dividing the business property can be a nightmare
One of the most difficult issues that arises when business partners divorce is trying to put a value on the business.  Valuing the business is required in order to determine the value of each spouse's interest in the business.  Like dividing other assets during a divorce, each spouse's interest in the business must be divided as well.  If the business is started after the marriage in a community property like Nevada or California, it must be divided evenly in the event of a divorce.   If one spouse enters the marriage with a business in a community property state, any appreciation in the value of the business will generally need to be divided evenly in the event of a divorce.   This is true in either case even if one spouse did not officially contribute to or work for the business.  A spouse's interest in the business may be satisfied with other marital assets equal in value to the spouse's interest in the business, or the spouse's interest in the business directly.  The process of establishing a spouse's interest in the business and arriving at an agreed upon value is a long, emotionally painful and expensive process that can have a severe negative impact on the operations of the business.
Plan ahead and put it in writing!
Whether you use a prenuptial agreement, a shareholder agreement or a buy-sell agreement, you need a written contract that describes how the interests of the co-owners will be established, bought, sold or valued and divided in a divorce.  If these considerations are not memorialized in a writing, there will inevitably be a legal dispute over the value of the respective parties' interests in the business.  This type of legal fight could potentially last two years or more.  It could also mean the end of your business.
The business may be the root of the marital problems
To make matters worse, the business may actually be the root of the problem that caused the marriage to fall apart.  Whenever that is the case, emotions complicate the issues and make it difficult for spouses to reach an agreement of valuing the business.  Spouses, as co-owners, often build resentment over the investments of time, effort, and money that were made in the family business.  The sacrifices that were made by the co-owners play a bigger role in valuing the business, which cannot be quantified.  When the business itself is a source of conflict, the co-owners become contentious and it is nearly impossible to reach an agreement.  This is where having some type of agreement, already in place, can make the divorce process less difficult, as it relates to the business.
If you have questions regarding divorce issues, or any other family-owned business planning issues, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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