What Happens to a Business in a Divorce?
Published April 19, 2014 | Updated June 1, 2014
by Kathy Tremmel, Business Attorney
While a divorce is a difficult and painful process under normal circumstances, it can be especially stressful and complicated for a business owner. These issues are even more complex if both spouses own the business.
As a practical matter, the business needs to continue operations while the divorce process unfolds.
There are some steps you can take long before a divorce is imminent to protect your company’s interests and your interests.
- Company operating agreements or shareholders’ agreements frequently contain buy-sell provisions addressing what happens in the event of a divorce.
- A Buy Sell Agreement specifies how the ownership interests of the business will be reacquired by the business owners or the company in the event of a divorce.
- A premarital agreement defines how assets and debts of the couple are allocated in the event of a divorce.
Managing A Business During a Divorce
Going through a divorce is a huge distraction for a business owner and takes tremendous time and energy away from running the business. It is also distracting for employees, who are concerned about the future of the business and their jobs.
If both spouses work at the company, it is especially important to put agreements in place regarding each spouse’s rights, duties and responsibilities regarding running the business. If both spouses can explicitly acknowledge their mutual interest in keeping the business healthy and use a divorce process that allows for the orderly, planned use of time and resources, they reduce the impact of the divorce process, to the extent possible, and present a solid, controlled picture of the business to third parties and employees.
Most business owners want to keep information about the operations of the business to remain confidential. The divorce process may expose the confidential inner workings of the business to public scrutiny. Court records, including testimony and exhibits regarding business operations, management and valuation, are public records.
Who Gets the Business? Is the Business Community Property?
Depending on the facts and the law of the governing jurisdiction, your business may be a divisible marital asset. In Texas, the first step is to decide whether the business entity is community property. Some important questions include:
- Did the business start before the marriage?
- What was the source of funds used to start the business?
- Did the business change formations during the marriage?
- Were any community funds put into the business during the marriage?
Even if the business is determined to be separate property, the increase in the value of the company during the marriage resulting from management efforts by the owner spouse may be deemed community property.
If it is determined the business is a marital asset, the divorce determines who will be awarded that business. While it is possible to have both spouses awarded a share of the business, as a practical matter it is pretty difficult for most people to continue running a business with their former spouse. A much more likely result is that one spouse will be awarded the business (typically the spouse more involved and essential to the functioning of the business), while the other spouse’s interest will be bought out.
What is the Value of the Business?
The value of the business depends on many different factors, including the amount of assets the business has, properties that the business own, current customers, intangible goodwill, as well as other financial information. There may be documents with buy sell provisions or a Buy Sell Agreement that specify formulas or guidelines for determining the value of the ownership interests. Otherwise, it may be necessary to hire a professional business valuation expert to evaluate the business and prepare a report analyzing the business and appraising its value.
Structuring the Payout
It may be crippling to a business’s cash flow to have to pay out the amount for the ownership interest immediately following the divorce. In many instances, the business will need to structure the payout over a period of a few years.
The issues involved when a business owner goes through a divorce are more complex than in a divorce where the parties are employees with standard assets, such as real estate, 401(k) plans, and vehicles. It is important for business owners to work with a good divorce attorney and a good business attorney to develop the best approach to the divorce process and to protect and preserve the business.
Article and information is courtesy of Kathy Tremmel, Business Attorney at Tremmel Law, PLLC. Amplify Credit Union does not endorse or guarantee the perspectives, the advice, the users, the businesses, or the products or services sold by any users or businesses that appear in this article.