How to Divide the Family Business in a Divorce

One of the many questions raised by a divorce is knowing what property you will receive at the end of the divorce.  The answer to that question greatly impacts what your financial future will look like moving forward as a single individual.  Owning a business with your spouse adds a layer of confusion for you and your business to resolve when going through a divorce.  Gaining some knowledge to assist you in setting expectations before you begin the divorce process can help you negotiate the best outcome for dividing your business during a divorce.

Are there any agreements that address what happens at divorce?

Before a couple gets married or decides to start a business together after marriage, there are legal protections they can put in place to best handle their business in the event of a divorce.  Prior to the marriage, a business owning spouse could have entered into a prenuptial agreement to protect the business or set forth how the business is to be divided in the event of a divorce.  A couple who opened a business during the marriage could have also entered into a postnuptial agreement at a time when the marriage was in distress to control the outcome for their family business in the future should a divorce happen.  Having entered into a prenuptial or postnuptial agreement would save time and money as the document sets forth clear terms to what happens to the business and what each spouse is to receive.

Another way married couples could have protected their company from divorce litigation is to create specific agreements that set forth how the business will be divided in the event of a divorce.  Most commonly, the company will have terms set forth in a buy/sell agreement or Articles of Incorporation for an LLC or a Partnership agreement or a Shareholder agreement depending on how the business is set up.  These agreements are also used when the spouses are not the sole owners of a business, to prevent the impact on the continuity and profitability of a multi-owner business post-divorce.

What happens at divorce if I had no agreement?

The business is considered marital property subject to division.  This is like the division of your house, motor vehicles, bank accounts, securities, life insurance, and retirement.  The value of the business needs to be determined before it can be divided.  This sounds very cut and dry, but there are a lot of factors to consider in determining value that will need to be addressed prior to entering settlement negotiations including what outcome you want for your business (as set forth below).  There are a couple of other important questions for you to consider in determining the percentage of distribution at divorce. 

1. What was the establishment date for the business?
2. Did your spouse could receive distributions from your company during the marriage?
3. Did your spouse work at the business during the marriage?
4. Did your business grow during the marriage?
5. Did the business pay for personal expenses during the marriage?
6. Did you use marital money to fund the business during the marriage?
7. Did you use personal assets that were marital as collateral for business debt?

What are common ways to divide a family-owned business during a divorce?

There are three common ways to divide a business at divorce. First, you can sell the business.  Selling the business is a good option for spouses that might not have the funds to buy out the other spouse or no longer have an interest in running the business. Depending on the health of your business and the ability to sell promptly, this can be the fastest option for dividing business assets.  Second, you can be bought out by your spouse.  A buyout is best for a spouse who wants to keep the business and has the funds to pay their former spouse half of the business’ value.  Third, you can draft a new ownership agreement to remain co-owners after divorce.  This is suitable for spouses who need each other to run the business and can get along after divorce as business partners.

What do I need to have the business valued?

You will need to hire a business valuation expert for the divorce.  You will need to provide that expert with some (or all) of the following documents to complete the business valuation.

1. The Articles of Incorporation from the Missouri Secretary of State’s website if the business was incorporated in Missouri. 
2. Any formation documents that you possess.
3. Any stock certificates that you may possess.
4. The Operating Agreement.
5. The Buy-Sell Agreement.
6. The Shareholder Agreement.
7. Corporate Income Tax Returns for the past 5 years.
8. Profit and Loss Statements for the current year and the past 5 years.
9. Any prior business valuation that was completed for any reason within the past 10 years.
10. Bank statements for each business account for the past 5 years.
11. Credit card statements for the business for the past 5 years.
12. Loan statements for the business for the past 5 years.
13. Prior offers to purchase the business for the past 5 years.
14. Appraisals for anything owned by the business such as real estate, equipment, or other business property.
15. Life insurance policies owned by the business for a business owner.
16. Life insurance policies owned by a spouse with the business listed as a beneficiary.
17. Organizational chart for the business.

The above documents will help you, your attorney, your forensic accountant, and your business valuation expert review every aspect of the family business.  This not only will assist in determining the value of the company but will also assist in determining if anything suspicious has occurred in anticipation of divorce.  Once the company valuation is complete, you are in the best position to negotiate a settlement or safely proceed to trial if necessary.

Should you need the advice of an experienced divorce attorney or have questions or concerns about your situation, know that we are here to help and ready to discuss those issues with you.