What Happens to the Family Business in a Divorce?

One of the concerns some couples encounter in the run-up to a divorce is whether they will lose a family business. They may fear that the division of their assets will force the sale of a long-held family business, potentially destroying the livelihood of one or both spouses. There is no doubt a family-owned business will add complexity to a divorce, but in most cases the couple can negotiate a fair solution.

If a breakup is on the horizon, start with business housekeeping. That means making sure all records are current, taxes are paid, incorporation is up to date and you have accurate and detailed financial statements. Although some spouses operate a business together, often one spouse operates the business and may even have owned it before the marriage.

The financials will be scrutinized by lawyers and accountants from both sides and should include such things as profit and loss statements, business tax returns, and statements for business bank accounts and credit cards. Family-owned businesses often mix business and personal expenses, and all of that will have to be sorted out to draw an accurate picture of a couple’s finances. Both sides also will want to see partnership or shareholder agreements, which may place restrictions on the sale of shares in the business and likely cannot be overridden by a divorce. The records must be shared with both sides, so don’t even think about anything less than 100 percent transparency.

 

Valuation and cashing out can present hurdles  

Valuing a business can be the most difficult part of the divorce process when a business is involved. This is a job for experts, and it is not unusual for the spouses to have dueling experts with widely varying opinions. Not surprisingly, the spouse who wants to cash out his or her share may have a higher value in mind. One way to resolve the disagreement is for both parties and their experts to agree to the selection of a third expert. Regardless, valuation is the starting point for dividing assets, and it is almost always better for the couple to arrive at a number rather than letting their inability to reach an agreement force a court to do the work.

One spouse sometimes will agree to ongoing payouts from the business over time, but it is more common to want cash up front. The spouse holding on to the business may worry about having to take out a loan to effectively buy the business, but that is not always necessary. A divorce in Georgia requires only an equitable distribution of total assets, and that means one party may be able to keep the business free and clear while evening the distribution by relinquishing a home or other property, such as a portion of a retirement account. The worst-case scenario – a forced sale of the business in order to bring liquidity to it as an asset – usually will not be in the interest of either party.

 

A prenup may simplify the division of a business

If one partner owned the business before the marriage, only the appreciation of the enterprise following the marriage will be regarded as marital property. Calculating the increased value is part of the valuation diligence and adds complexity and a potential area of disagreement, however. A prenuptial agreement may simplify a breakup by laying out a valuation process or setting conditions for how a business will be considered in a divorce.

As with all matters in a divorce, early consultation with an attorney who can explain your rights is likely to make the process unfold more smoothly and assure you of a fair division of a family business and other assets.

Boyd Collar Nolen Tuggle & Roddenbery welcomes the opportunity to learn about your legal needs and provide more detail on what services we offer. For more information about how Boyd Collar Nolen Tuggle & Roddenbery can help you, please contact us at 770.953.4300 today.