Many couples who own a family business together have dedicated enormous amounts of time, money and effort to their enterprise. A family-run business often represents more than just a source of income; it may be part of a family’s way of life. When couples decide to part ways, it is important for them to know that a divorce does not have to mean the end of the business they built together.
Family-run businesses represent 90 percent of U.S. businesses, according to the Small Business Administration. Many families appreciate the flexibility, lower employment costs and sense of ownership such businesses provide. For these reasons, and many others, couples may desire to keep their business running despite going through a divorce.
Of course, deciding upon an appropriate plan for a family business after a divorce is challenging. Spouses may have different ideas about what should be done with the company, the roles each spouse should have, and how business goals are best accomplished. Luckily, there are several options that can be considered.
Options for Dealing With Family Businesses in Divorce
One option is for both spouses to continue working at the business in their current roles. If spouses choose this option, it is important for both parties to be realistic about their ability to function together as a team. This is especially important if the spouses are both partners in the enterprise.
Another option is for one spouse to step back into a different role, but remain involved in the business’ workings. In this situation, make sure the expectations and limits of the new role are clear and agreeable to both spouses. Plans will also need to be made for the transition and potential replacement employee. These items can be discussed as part of the divorce process.
The parties may decide that it is best for only one of them to keep the business, and the other to be compensated with an appropriate payout. The payout a spouse receives may be based on his or her interest in the business, and can be accomplished using the equity in the marital homestead or another large asset.
Finally, there is the option of selling the business and dividing the proceeds. One issue to keep in mind is that, although family businesses may be very valuable, they also generally are relatively illiquid. In other words, it is difficult to convert the business into cash while retaining its full value. Although this may be the best option for some couples, they should be prepared for the possibility of not recouping the full value of their business.
Strategies and Tips
Whatever divorcing spouses decide to do with the business, they should keep several things in mind. First, it is important that both parties try their best to separate personal disagreements from business discussions. Of course, this may be easier said than done, especially if emotions related to the break-up are running high. The parties, however, should try to focus their energy on protecting the value and integrity of the business. They should consciously try to be objective and rational, and open to the idea of compromise.
Much disagreement can be avoided if a couple already has a prenuptial agreement in place detailing how the family business is to be handled in a divorce. Of course, many couples do not realize the value of a prenup until it is too late. For those that plan ahead, however, a well crafted prenuptial agreement can serve to clearly define the future of a family business and both parties’ roles in it after a divorce.
It is also crucial to have a proper business valuation completed. In order for both spouses to reach a fair agreement about the division or sale of the business, its true value needs to be determined. Particularly if only one spouse is retaining the business, he or she has an incentive to understate its value, while the non-owning spouse may seek to overvalue the company.
A number of professionals can complete business valuations, including accountants, financial analysts, business appraisers and certified divorce financial planning experts. A business valuation encompasses more than just a business’ assets and liabilities. Past earnings and future projections also need to be considered to arrive at an appropriate valuation.
Finally, it is important to contact a knowledgeable Texas family law attorney. An experienced lawyer can advise you of the state law and the options available to you. For example, since Texas is a community property state, it mandates that all marital property, including family businesses, be divided evenly.
The end of a marriage does not have to mean the end of a family business. If a couple desires for a business to continue, a number of options are available. By working together and seeking the advice of experienced professionals, couples can customize a plan that addresses all their needs and keeps a business running.
