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Home » How Can Divorce Impact Family-Owned and Closely Held Businesses?

How Can Divorce Impact Family-Owned and Closely Held Businesses?

October 10, 2023

If you or your spouse has a family-owned or closely held business, you may be worried about how a divorce may affect the company. A divorce can impact the operations and finances of the business as well as damage the family relationships of those working in the company. However, there are ways to minimize some of the problems if the parties are willing to cooperate throughout the divorce process.

How Are Business Interests Treated in Divorce?

A party’s interest in a business is a marital asset subject to equitable distribution. It’s also a source of income from which alimony or child support can be paid. As a result, properly valuing business interests and determining what income should be attributed to the owner-spouse is essential.

Once the business is valued, the owner-spouse generally retains his or her business interest and “buys out” the other spouse’s marital interest in that asset or other assets will be given to the nonowner-spouse to ensure assets are divided equitably. The divorce settlement agreement can be structured to allow for situations where the owner-spouse doesn’t have the funds or other property to buy out the nonowner spouse.

How Can Divorce Disrupt the Business?

The discovery process in divorce can be intrusive and disruptive to the day-to-day operations of the company. The time spent gathering and explaining business records is time taken away from managing the company. 

The parties are required to disclose their assets and income in their Financial Affidavits as well as provide documentation during discovery. Parties may also request written answers to questions or seek to depose individuals with knowledge of the company’s finances.

Often, an accountant or business valuation expert is hired to assist in determining what the business is worth and the owner’s income. The financial expert will review and analyze business records, such as tax returns, general ledgers, bank statements, accounts payable and accounts receivables, operating agreements, shareholder/partnership agreements, and other documents. 

What Is the Impact on Family Relationships of Those Participating in the Business?

If both spouses or other family members are involved in the business, the tension and negative emotions created by a pending divorce can interfere with everyone working together effectively. There may also be fears and resentment over how much the spouse may get in the divorce and how it will affect the future of the business. 

Are There Tactics that Can Minimize Problems for the Business?

The best way to avoid disruptions is to cooperate during the divorce process. For instance, the parties can agree on jointly hiring a valuation expert to avoid the time and money involved in each side having their own expert and arguing over the results. Regardless of whether there is a joint expert, the owner-spouse can provide open access to necessary documents and encourage other family members involved in the business to assist in expediting the discovery process.

Another helpful tactic is for couples who haven’t yet filed for divorce. Ideally, couples should have a prenuptial or postnuptial agreement that addresses how business interests will be divided in the event of divorce. It is also a good idea for family-owned and closely held businesses to require owners to obtain a prenup when they get engaged or get a postnup if they are already married.

If you or your spouse has a family-owned business, it is essential to hire an experienced divorce lawyer. Our attorneys understand the issues and concerns of both sides in the divorce and can help structure and advocate for a fair result. Contact us today.

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