Family businesses such as restaurants, technology services, professional services, and daycares are the lifeblood of the economy. Many of these businesses are operated by both spouses. Even when one spouse operates the business, the other spouse often helps the spouse in a myriad of ways such as caring for the children or providing her/his own income in down times, so the business can prosper.
- Family businesses account for more than 75% of new jobs, 64% of US gross domestic product, and 62% of the country’s employment.
- Nearly 35% of Fortune 500 companies are family-controlled.
- Family firms “comprise 90%of all business enterprises in North America.”
When business owner spouses divorce, decisions need to be made about whether the business will continue, who will own the business, and how the business affects alimony and child support. In many divorces, the family business is the second most valuable asset after the family home. You should have an experienced divorce attorney to help you protect yourself, your business, and your future.
What factors do spouses need to consider when a divorce includes a family business?
At Holland Law, we ask our clients to consider the following issues when there is a family business:
- Do you want to be an owner of the family business after the divorce is final?
- Are you okay with the business continuing, or do you want to sell the business?
- Do you have an interest in working for the business?
- What if working for the business means working with your spouse?
- What income does the business produce?
- Are there other partners or owners involved in your company?
- What are the rights of any partners to the business?
- Is the family business incorporated?
- Does the business require that the owner or operator have a license?
- Are any special skills required to run the business?
Many spouses want to keep the business running after the divorce because it’s their livelihood. Having an income is certainly good for the spouse who runs the business. A steady income is also good if you need alimony and for paying child support for the kids. Older couples may be planning on passing the business on to their children when they retire, and may wish to keep it intact for this reason.
Can premarital agreements protect a family business?
Spouses who own a business before they marry should have a premarital agreement in place. Spouses who develop or acquire a business during the marriage should create a post-marital agreement. These agreements are created to address property division and alimony issues. When there is a family business, a premarital or post-marital agreement can outline what happens to the family business if there is a divorce. These documents usually determine:
- Which spouse or spouses will own, manage, and operate the family business, if the family business continues.
- If the business is to be sold, how the value of the business will be determined, and what percentage of the value each spouse gets.
- Whether a spouse will be entitled to alimony and whether the family business will be a factor (or not) in determining the amount of alimony.
Pre- and post-marital agreements should specifically indicate if the family business will be considered marital property. Further, even if a premarital agreement provides that your spouse can keep the family business and you have no financial interest in the business, the business will be considered when deciding how much child support your children should receive because it creates income. While a premarital agreement cannot outline child support, it is worth keeping this fact in mind when you create the document.
How are family businesses valued in divorce?
A common point of contention in divorce cases is determining how much the business is worth. There are different ways to value a family business. Often, financial business appraisers are employed to set a value. For example, some appraisers may focus on the business assets while others may focus on the income the business produces each year.
When the appraisers have different values, the value dispute may be settled through negotiation or alternative dispute methods such as mediation.
The main ways of transferring the business when spouses divorce
There are different considerations depending on whether you want to keep the business running, have an interest in the business, or sell the business.
- If you want the business to continue, you and your spouse need to decide what the business structure will be and who will own the business. You’ll need to decide what role each spouse will have in running the business and how much each spouse will be paid.
- If you want to keep the business, you will need to buy out your spouse’s share (once the value is set). If you don’t have the cash for a buyout, you may need to waive some of your rights to some of your spouse’s share of the marital property, such as your right to some of his/her retirement benefits.
- If you want to sell the business, you’ll need to arrange for a broker or a way to sell the business yourself. You and your spouse will need to agree on what percentage of the sale price each spouse will receive, or have a judge decide the equitable division amount for you.
It may be possible to divide the family business in a practical way. For example, if the business has two comparatively successful locations, then you might agree to run one location while your spouse runs the other location. You can outline this in a premarital agreement, or discuss this option during mediation.
If there is a family business at stake in your divorce, firm founder Tom Holland can help. He’ll discuss your rights, your goals, and the best ways to achieve those goals. Many disputes about the family business are resolved through negotiation, mediation, or collaborative divorce. At Holland Law we work with appraisers, accountants, and other financial professionals to help value your business. We represent spouses in York, Lancaster, and Chester Counties. Call us today to schedule a consultation in our Fort Mill office on Gold Hill Road, or in our Rock Hill office on Oakland Avenue at 803-219-2630, or fill out our contact page.
Tom Holland previously served as the General Counsel for the Lancaster County Sheriff’s Office, the City Solicitor for the City of Lancaster, and as a Special Assistant United States Attorney for the Sixth Circuit Solicitor’s Office. He is a single father, and through his own divorce gained valuable insight he now uses to provide Fort Mill and Rock Hill, SC families with the best representation. Learn more about Tom Holland.