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Be mindful of these points if divorcing with a family business

On Behalf of | Sep 13, 2022 | divorce

The family business is usually a source of pride for the owners, but it can quickly become a significant point of contention if they go through a divorce. There are a few things to remember if you’re one of the individuals divorcing and trying to determine what’s happening with the family business.

One of the most important things to do when deciding to divorce is to have a valuation of the business. This will give you the bottom line of what the company is worth so you can use that information to determine the next steps. In some cases, the business’s Operating Agreement will provide a specific methodology to value the business. Otherwise, an experienced business valuation professional can provide the parties with information to assist them in deciding their next steps.

Options for the company’s future

There are three main options for a company’s future when the owners go through a divorce. Each has pros and cons that both parties should consider as they’re negotiating what’s going to happen to the business.

  • One party keeps the business: In this case, one spouse buys out the other. The terms of this buyout, including the manner and timing of payments, should be set forth clearly in writing to protect both parties.
  • Both parties run the business: Some people can continue to run a business together as partners after their divorce. A contract that includes concise terms about compensation, benefits and responsibilities is crucial.
  • The business is sold or closed: This gives both parties a fresh start. Typically, any profit from the sale of the business is equitably divided between the parties. If the company closed with debts, those would likely also be shared by both parties.

Think carefully about what you can reasonably live with as you start your new life. This may help you decide what’s best for you and for the company.

A word of warning

Sometimes, only one spouse is aware of the financial state of the family business. This sets up the chance for sudden income deficit syndrome, which occurs when the knowledgeable spouse makes it appear as though the company isn’t as profitable as it truly is. This can be done in various ways, and it’s often unexpected by the spouse who isn’t familiar with the business’s finances. Because of this, some people include a forensic accountant on their divorce team so they can ensure that everything is on the up and up.

Ultimately, your job in a divorce is to protect your rights. Having a divorce team that understands your goals and desires can help you to walk away from the divorce process with the settlement you need to start your new life on the best footing possible.