What Happens to Family-Owned Businesses in Divorce?

Small business owners invest time, money, and passion into building something valuable and important. However, sometimes the stress of running a business or other life circumstances can push a marriage over the edge. When that happens, you may be left wondering what happens to family-owned businesses in divorce?

Business Interests are Property in North Carolina Divorces

North Carolina law says that anything you and your spouse earned, purchased, or gathered while you are married can be equitably divided in divorce. That includes a business you started after you got married. Even if only one spouse was actively involved in the business, North Carolina law assumes that the other spouse’s income, support, and efforts at home made it possible for you to launch and grow your company. Because of this, each spouse is entitled to an equitable (but not always equal) share of the value of the family-owned business in divorce.

However, who takes actual possession of a family business in divorce depends on negotiation. If you and your spouse agree, you can protect your business assets in how you structure your settlement agreement. Depending on the nature of your business and the roles each spouse played, you might agree to:

• Award one spouse the business and the other spouse other assets, such as the home or retirement accounts
• Buy out the spouse’s interest in a shared business in one lump sum or monthly payments over time
• Dividing up the business into portions each spouse controls, while cooperating as shareholders
• Dissolving the business and entering into agreements over who takes specific clients or accounts
• Selling the business to a third party and dividing the net proceeds

Which option is best for you will depend on your complete financial situation, business history, and many other factors.

How Do North Carolina Courts Put a Value on Family-Owned Businesses in Divorce?

In order to give each spouse their equitable share of business assets, you or the court must put a value on those assets. Often, this requires a business valuation. Your divorce attorney can help you hire an expert to estimate the value of your business based on:

• Market value: What an outside buyer would pay for it,
• Book value: Its current assets and liabilities adjusted by various market factors

Many small business owners do not have a clear understanding of the value of their business. They may undervalue their existing client relationships or overestimate their anticipated growth. That is why having an expert evaluation is important to setting the correct equitable value of the business.

What if You Owned Your Business First?

Sometimes, especially when you inherit a family business, your ownership of the company predates your marriage. Assets owned by either party prior to the marriage are considered the separate property of that party. If you do own stock in a family business, you may want to consider a prenuptial agreement prior to marriage to document your ownership. If you started or inherited the business after your wedding day, you can also use a postnuptial agreement to protect your business assets from being divided during divorce. In these agreements, both spouses (or spouses-to-be) agree that the business assets are not marital from the start.

What if Your Spouse Worked for the Family Business?

If you and your spouse both worked for the family business, separation can sometimes mean a loss of income. You should be prepared to offer temporary post-separation support to allow your spouse time to find replacement employment. Offering a reasonable severance package based on their role in the company is also an option. These options demonstrate your good will and could save you money later in negotiating a fair distribution of the company assets.

Closely Held Businesses with Share Buyback Provisions

If you co-own your family business with parents, siblings, or other partners, you should also pay close attention to your company’s operating agreement. Many closely held businesses will require the business to buy back any shares awarded to a divorcing spouse or other third party. If you do not carefully review these provisions before entering negotiations, your company could lose value and your own shares could be reduced as a result of divorce.

Protect Your Family-Owned Business in Divorce

At the Cox Law Firm, our experienced and compassionate divorce attorneys know how important a family-owned business can be. We understand how to work with couples who share business interests, and how to protect business assets in divorce. We will give you options to avoid closing your business as part of the divorce. If you are ready to get started, please get in touch with the Cox Law Firm by calling  704-243-9693 or visiting our  Contact Page.