A family business allows members of the family to take a personal stake in the success of the company and provide a supportive environment. However, when a couple decides to get a divorce, the separating spouses may not be able to maintain the same business model and will have to decide what happens to the business.
Deciding what to do with a family business in a divorce can be complicated and there may seem like there are no good options. If you have any questions about business assets and running a family business after a divorce in North Carolina, contact your family law attorney for help.
Options for Handling a Family Business in a Divorce
The primary options for handling a family business is to either decide what to do between the couple or have the court handle your business. There are a number of reasons why business owners may not want to have the court decide how to value and divide up the company. As with child custody and visitation agreements, it is generally in the family's best interests to settle the family business in divorce between the parties.
Alternatively, a business owner may want to have the court decide what happens to the business when one spouse is acting in bad faith. One spouse may be financially or reputationally harming the business during the divorce process or engaging in fraud. Talk to your North Carolina divorce attorney about your options for settling the business and when you may want the court to step in.
The shareholder agreement may provide for eventualities like the partner-spouses splitting up, or what happens when non-family members hold shares in the company. If the shareholder agreement controls what happens to business ownership in the event of a divorce, the business and spouses can proceed accordingly.
When a business-owner gets married, they may have considered a prenuptial agreement to cover their business assets. A premarital agreement is a written contract that is signed by both members of the couple before the marriage occurs and can be used to describe what will happen to business assets if the marriage eventually ends. This option can help reduce or eliminate the time, stress, and expense of a legal battle around the division of business property.
Sell the Company
Selling the company will allow both spouses to step away from the business and should be a way to compensate both fairly. Provided there is a ready buyer for fair market value, the spouses can sell the company and divide the compensation equally or based on some other formula.
Buy Out the Other Owner
Buying out one spouse is generally the most straightforward way of compensating both parties while allowing the business to continue operation. Getting a fair valuation for the company and offering one spouse a fair amount for their interest will allow each spouse to part ways and not risk the company. Generally, when one spouse is primarily active in running the company or the company was in that spouse's family before the marriage, that spouse may be the one who offers a buyout.
Divide Up the Business
Depending on the type of business, there may be ways to divide up operations by creating a new business or splitting the company into two new companies. Splitting a company can be complicated and there may be reduced profitability for both companies after duplication of business functions, reduced liquidity, or overlap of customer base.
Continue Running the Business
Continuing to run the company as business partners but no longer marital partners can be difficult. Some couples are able to keep their business and personal relationship separate but many cannot. Personal disputes, custody and visitation disputes, or anger over new relationships can have a negative impact on the running of the company, even long after the divorce is finalized. If you are considering continuing to work together after a divorce, make sure you have an advocate on your side to provide you options and solutions to any unforeseen issues.
Litigating the Business Assets
When the court decides what happens to the business and business assets, the first step may be to get a full valuation of the company, through a conclusion of value report. This can take some time, especially when there are poor record-keeping practices. The business owners may also be frustrated by the on-site visits or interviews as part of the evaluation. Even after an analyst or appraiser comes to a conclusion, the parties may be in dispute over the valuation.
After valuing the business and determining how much of the business is considered marital property, separate property, or divisible property, the court will generally divide the business assets based on equitable distribution. This could result in giving one party the business in exchange for giving the other party other assets. It could also involve forcing a sale of the business and dividing the assets.
Equitable distribution is not necessarily a 50-50 split. There are a number of factors that can go into the court's determination, including:
- Income and property of each party;
- Contributions (direct and indirect) to an increase in value of the business;
- Debts and liabilities of each party;
- Reasonable expectation of compensation; and
- Direct or indirect contributions made by one spouse to help the career potential of the other.
Mediation and Business Assets
When the business owners cannot come to a final agreement on how to settle the company and business assets, mediation can help the spouses agree on a satisfactory settlement. Mediation involves having a third party “mediator” to facilitate identifying the primary issues and help the parties come up with their own solution. Mediation can save time and money over court litigation and is also confidential, allowing the business owners to keep their issues private.
Depending on the family members involved in the business, mediation is also generally less contentious than litigation, which can help maintain a cooperative relationship in the future, where children or other family members may still be involved in the family business.
Questions About Business Assets in a Divorce
A business can represent significant assets in a divorce. Talk to your attorney about your options for settling a business in a divorce and how to protect your financial interests for yourself and your family. If you have any questions about filing for divorce in North Carolina, contact the Caulder & Valentine Law Firm, PLLC. Contact us online or by phone at 704-470-2440 today for a consultation.