Most business owners are so busy working to ensure the growth of their businesses, that they never consider the legal and financial consequences divorce can have on their business. It may be that spouses are joint owners, who divorce one another, or only one of the co-founders of the business gets divorced from his or her spouse. Either way, if the division of property is not handled appropriately, there can be serious financial consequences for the business. Family-owned business issues following divorce can be stressful, but if you plan ahead just in case, those stresses can mostly be eliminated.
The importance of planning for divorce
If your accountant or financial advisor told you that you were about to enter a business transaction that could very likely result in you losing more than 50% of your business assets if it fell through, you would no doubt insist on putting that transaction in writing. You would want to plan ahead and include any language necessary to ensure that your interests are protected, should something go wrong in the future. With divorce statistics indicating that nearly 50% of all marriages in the United States end in divorce, it would seem pretty logical that married business owners would have a plan. However, the reality is, most businesses lack a sufficient plan that addresses divorce or separation of its owners, despite the potential for financial issues.
One of the worst issues following divorce is the division of business assets
Possibly the most problematic issue caused by the divorce of business partners is determining the value of the business assets in order to accomplish a fair division of those assets. The same thing is required when spouses divorce and their personal property, such as their home, must be sold and the proceeds divided between them. However, with a business, unless the decision is made to dissolve the business, it cannot be sold. Especially when a co-owner is getting a divorce from someone who is not a part of the business, it is necessary to determine the value of the business assets in order to provide each spouse’s appropriate share. In many states, all property and income gained during the marriage is considered shared property and must be divided evenly during a divorce.
Establish a written plan now
There are various ways to plan for the possibility of divorce. You can have a prenuptial agreement that also deals with business assets, or you can establish a shareholder agreement or a buy-sell agreement. Those are simply written contracts that explain how the business interest of the co-owners will be bought or sold, under certain circumstances, such as divorce. If you do not have a plan in place, a legal dispute over the value of the business assets may be unavoidable. A legal battle of this kind could last two years or more, and could also mean the end of your business.
If you have questions regarding divorce consequences, or any other family business planning needs, please contact Sexton, Bailey Attorneys, PA online or by calling us at (479) 443-0062.