How Can Family Businesses Be Divided After a Divorce?
Family-owned businesses are an integral part of the U.S. economy. With over 5.5 million family businesses in the United States, family businesses make up 57% of the GDP and 63% of the overall workforce. A divorce when a family business is involved has special considerations when determining how the business will be divided. Read on to find out more.
Decide Who Will Continue to Run the Business
In the event of a divorce, there are typically three routes that are taken in deciding how to move forward:
- The two parties continue to operate the business as business partners
- One party “buys out” the other party
- The two parties sell the business and split the proceeds
Which route you take depends on many factors.
Operate as Business Partners
In an amicable divorce, both spouses might decide they want to continue to work together and operate as business partners.
If the two parties do continue to run the business together, some of the potential complexities are simplified by operating under a predetermined revenue split.
However, choosing this option does not come without risk. Some may find it challenging to separate professional from personal issues.
Any differences in opinions on how the business is run must be carefully managed because there may be some ambiguity as to which spouse owns the assets and debts of the company.
Following the divorce, there will be a determination of what property is considered separate property owned by which spouse. A dispute about business operations could revive these issues.
A Buyout Agreement
The most practical solution is for one spouse to buy out the other. The goal is for one side to give a fair amount in exchange for the other party’s share of the business. A buyout allows for one side to completely exit and the other side to have full ownership.
The difficulty is in agreeing upon a fair value for the business. Without actually selling the property on the market, the valuation has to be determined with a proper appraisal.
The following are potential factors that could affect the perceived valuation of the business:
- Long-term fixed assets (machinery, equipment)
- Intellectual property (patents, trademarks, copyrights, trade secrets)
- Partnerships and clientele
- Future profitability
- Operating expenses
- Historical accounting
Whether the divorce is contentious or amicable, both sides will benefit from a qualified expert who can provide a fair and accurate appraisal of the business.
Sell the Business and Split the Proceeds
Both parties may decide that the best course of action is to move on from the business altogether. The upside is that finding the company’s value is more straightforward as the market will decide on the buying price. The complication comes in determining who owns what asset.
Whether the business began before the marriage and what type of business it is will determine whether it is separate property or community property.
One additional factor is the ownership form of the property, or whether it is technically owned by only one spouse or co-owned by both spouses. Another factor is whether a prenuptial agreement was signed that determined who owned what property before the marriage.
Contact an Attorney to Decide How to Handle Your Family Business
Both family law and business law are complicated fields on their own. In the case of a family business, the intersection of the two sets of laws can create a complex situation. Gucciardo Family Law can help you decide how to divide your family business after a divorce.
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