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What Happens to a family business in a divorce?

Many couples are living the American dream as small business owners.  What happens to the business when the couple decides to go their separate ways?  Avoid having your dream turn into a nightmare by understanding the possible consequences of a divorce on a business.

For the divorcing couple with a business there are three possible outcomes:

  1. One party sells the business to the other party
  2. The business is sold to a third party and the proceeds divided
  3. The parties continue to run the business after the divorce, the terms of which are spelled out in the marital settlement agreement

Selling the Business

Whether the business is sold to the other spouse of sold to a third party, the first step is getting a professional business valuation done.  The parties may believe they have an idea of the value of the business but more often than not they are wrong.  One spouse may approach the other with a “great deal” that later turns out to be advantageous to only one party.  Without the benefit of a business valuation neither party can really negotiate in good faith.  While this is an expense outside of the divorce lawyers and court fees, it is well worth it in the long run as neither party can come back after the divorce and say that they got less than they should have received.

Marital or Non Marital in Nature?

Business assets can be marital or non-marital in nature, depending on many factors.  For example, a spouse could loan the business money that the spouse had prior to the.  The repayment terms could spell out precisely the source of the loan and the expectation that it be repaid as non marital.  However, most couples go into business together not thinking about divorce.

Co-mingling and Transmutation

The ownership of the business assets can become complicated by co-mingling.  For example, the wife owned real estate prior to the marriage.  The parties started a business in the storefront of the property after they got married.  The wife refinances the building to bring in additional capital for the business.  She adds the husband’s name onto the deed thinking that they will be together forever.  When the divorce hits she wants all of the money that she put into the building prior to the marriage to come back to her in the settlement.  Unfortunately, she has mixed her non-marital and marital assets and transmuted them.  The building is now marital property, as is the business that they started.

Keeping the Business Post Divorce

While the idea may seem difficult, it is not impossible.  If the business is going well why sabotage a revenue stream for both parties?  As part of the divorce settlement process the parties can draft a partnership agreement that outlines their interest in the company after the divorce is finalized.  In fact, if the parties can ride out the divorce and the business is solvent, both are in a much better position to handle the dissolution of the business, if it were to come to that,  as the emotional messiness of the divorce will be behind them.