What might happen to a family business during divorce?

When a couple going through a divorce owns a family business, the separation process becomes considerably more complex. A family business isn’t just a source of income. It’s an asset that might represent a significant portion of the marital estate.

Determining how to handle a family business during a divorce requires careful consideration and, oftentimes, intricate legal maneuvering. The outcome depends on various factors, including the structure of the business and the couple’s circumstances.

Marital versus separate property

The business must be evaluated to determine whether it is marital property. This involves assessing when and how the business was established, the contributions of each spouse to the business and how it was managed during the marriage.

Valuation of the business

An essential step in the property division process involves valuing the business. This typically requires hiring a professional business appraiser to determine its fair market value. The valuation process can be complex, considering factors like the business’s assets, debts, earning potential and market conditions.

Options for dividing the business

Once the business is valued, there are several common ways to address it during a couple’s divorce:

  • One spouse buys out the other: If one spouse wishes to keep running the business, they can buy out the other spouse’s share. This can be done with cash or by trading off other marital assets of equivalent value.
  • Sell the business and split the proceeds: The couple may decide to sell the business and divide the proceeds. This option is often chosen when neither spouse wants to continue the company or if a buyout is financially impractical.
  • Continue co-owning the business: Some ex-spouses continue running their business together post-divorce. This requires a high level of trust and the ability to separate personal issues from business operations.

Dividing a family business in a divorce involves various legal and financial considerations. It can impact both parties’ tax obligations, business operations and economic well-being, so it must be approached thoughtfully. Seeking legal guidance is a good way to get started.