What Divorce Means for the Family Business
June 2nd, 2022
When you are self-employed or work for a family business, a divorce can directly affect your bottom line. Understanding what divorce means for the family business can help you make smarter decisions, both at work and at home.
What Happens to a Business in Divorce?
A family business is often the single most important asset in that family’s divorce. A successful small business can be worth a substantial amount of money. It can also represent a significant investment of time and energy by one or both parties to a divorce.
Every Maryland divorce involves the equitable distribution of marital property. When one or both spouses has opened, grown, and operated a family business during the marriage, the couple’s business interest is on the table for distribution. A Maryland divorce judge cannot change the ownership of a company’s stock from one spouse to the other. However, the judge can grant a monetary award that represents the non-operating spouse’s interest in the business. In other cases, it may be necessary to sell or dissolve the corporation and divide up the assets between the spouses.
When is a Business Interest Separate Property?
If you are a solo entrepreneur, or have inherited the family business from a parent, you may wonder whether your spouse has any claim on the business at all. In some cases, a person who inherits a non-operating share in a family business may be able to retain that interest as separate property following the divorce. However, if you are actively involved in the management and operations of your business, in most cases, your spouse will have an equitable interest in at least some portion of the change in value of your business that occurred during the marriage.
One exception is where the couple signed a prenuptial agreement prior to the marriage, establishing how they intended to treat the business interests in the event of divorce. Often, if one spouse owns a business prior to the marriage, a prenuptial agreement is the best way to avoid having to sell the business to pay off a later spouse’s equitable interest in its success. However, it is important for such contracts to be fair. If you are asking your future spouse to give up any interest in your business, consider what they will be entitled to in return, and how you can make sure they understand the deal put before them.
Equitable Division of Business Interests
Dividing interests in a family business without compromising the integrity of a business can often be challenging. You, your business partners (if you have any), and your divorce attorney will need to carefully evaluate the company’s financial and practical position to determine what should happen to the business in the divorce. You should consider:
- Do you want to continue running your business without your spouse?
- What contribution has your spouse made to the growth of your business? (This can include taking over care of the home so you could focus on developing the company.)
- Could you replace your spouse as an employee or partner in the business?
- Do you have sufficient liquid assets or access to financing to buy out your spouse’s equitable share of the value?
- Do you have other assets or accounts that can be used to offset the business’s value (such as the marital home or a retirement account)?
- Can you afford to pay spousal maintenance and property division payments and keep your business running?
- Could you sell your business as a going concern and divide the equity?
- Would you benefit from having other assets instead of the family business?
Divorce Family Business Valuation
It should be clear by now that much depends on how much your business is worth. Business owners often drastically over or underestimate the value of their businesses. You may forget to offset its value by the amount of loans or investments you need to pay off. Or you might undervalue intangible aspects of the business, like your customers’ goodwill. Even if you do have a good handle on your company’s value, you will need to be able to demonstrate where that number came from to your spouse, their attorney, and also the court, should your case go to trial.
In most cases, this requires hiring a CPA or other expert to perform a business valuation. A divorce family business valuation provides an objective review of all aspects of the company, including:
- Accounts receivable
- Accounts payable
- Loans and investments
- Goodwill and reputation
- Fair market value
A business valuation expert will put all of these aspects together in a report, offering an opinion on the total value of your business, and any shares that may belong to each spouse.
Issues in Divorce When You Own a Family Business
In addition to the division of the business itself, divorce involving a business owner can also create other challenges:
- Determining a self-employed business owner’s actual income for child support calculations
- Balancing a business partner’s cash reserves and distributions in deciding whether spousal support is appropriate
- Potential loss-of-income claims if the property division puts a company out of business and leaves the business owner unemployed
All of these issues mean that if you are a business owner considering divorce you will want to work with an experienced Maryland family lawyer. At the Law Office of Shelly M. Ingram, our business divorce attorneys know how to balance a family business’s needs with the property division demands of the court. We understand what divorce means for a family business. We can assist you in establishing a fair business valuation, and dividing your property in a way that is equitable without putting you out of business. Contact us today to schedule a confidential office consultation.