How Do I Divide a Family Business during Divorce?

The path to divorce is never simple. And when spouses own a family business together, the process becomes even more complicated. Couples contemplating divorce often think about the family home, bank accounts, and retirement funds.

However, they often overlook their family-owned business, which can be the most challenging asset to distribute. It takes exceptional legal counsel to protect your family business so it can continue to grow and thrive even after you and your spouse divorce.

Generally, you have a few options. You can hand over the business to your soon-to-be ex-spouse, buy out your ex-spouse’s interests, or sell it altogether. A lot depends on how much the company is worth and the marital property rules in the state where you live. Here are some things to consider if you and your spouse share a business and are considering divorce.

Understanding Marital Assets

Marital assets are considered property that belong to both spouses in a marriage. Generally, it involves property acquired after the marriage was finalized. That can include anything from homes, cars, and jewelry; to bank accounts and investment portfolios. In New Jersey, unless a prenuptial or postnuptial agreement states otherwise, when a couple divorces, their marital assets are distributed according to equitable distribution.

Equitable distribution does not mean couples share assets 50-50. Rather, it means joint property is distributed in a way that is fair based on a variety of factors including how much each spouse earns, their expenses, and the duration of the marriage.

Conversely, nonmarital assets are considered property that belongs to either one spouse or the other. These are items or accounts that one spouse owned before the marriage. They are also considered nonmarital property, or separate property, if they were gifted to one spouse by someone outside of the marriage, such as an inheritance.

Each spouse leaves the marriage with whatever nonmarital assets they started with, unless they agree to different terms during mediation or have a prenuptial or postnuptial contract saying otherwise. 

Is My Business Considered Marital Property?

Now that the difference between marital and nonmarital assets has been examined, it is time to determine how to classify the family business.

To figure that out, the courts will consider many details, including:

  • The date the business was established
  • Source of the funds to start the business
  • Each spouse’s contributions to the business
  • The skills and expertise required to run the business
  • How much the business was worth before and during the marriage, and at the time of divorce

Unlike physical assets such as art or jewelry, a business is not quite as easy to classify for equitable distribution purposes. For example, if a couple launched the business before they got married using both their savings, it is likely to be considered marital property through a concept called transmutation in which personal separate property evolves into joint assets.

Conversely, if one spouse acquired a business on their own through purchasing it or through inheritance during the marriage, it may actually be considered separate property. In some cases, some parts of the business are considered nonmarital property, whereas others are considered marital assets. Some spouses have a written agreement that designates one spouse as the owner of a family business.

As can be seen, there is no one-size-fits-all solution when it comes to deciding how to deal with a family business during the distribution of property.  It varies from couple to couple and business to business. A consultation with an experienced divorce lawyer can offer clarity on your individual situation.

Determine the Value of Your Family Business

To treat the business like a marital asset, you need to first determine its worth. That is a complex endeavor. You need to hire an unbiased expert to provide a formal appraisal of the company. Your divorce lawyer can recommend one in your area.

To assess the value of your business, the appraiser looks at the following:

  • Tangible assets: This includes machinery, in-stock supplies, office equipment, and any vehicles and buildings that are owned outright. Cash in bank accounts is also considered tangible property.
  • Intangible property: These include things less easy to value, things such as customer relations and goodwill that affect how the public views the company and the brand.
  • Liabilities: These are things that take away from a company’s overall value, things such as scheduled outgoing payments including credit lines, or rent for office space or equipment.
  • Profits: Profits are the final piece of the valuation puzzle. Expect the appraiser to conduct a detailed examination of your company’s financial records.

Options for Dividing a Family Business in a Divorce

Once the business valuation has been conducted and if the company is subject to equitable distribution, the next step is to decide what happens to the company after the divorce.

When it comes to a family-owned businesses, there are few options:

One spouse keeps the family business. For couples who have no interest in working together after divorce, this is the most common option. Typically, the spouse more involved in running the day-to-day business operations buys out the other based on the appraised value.

If that spouse cannot afford to buy the other out outright, they might consider setting up a structured settlement note to be paid out over time.

Another possibility works when each spouse has shares in the company. The company can buy back shares from the spouse who wants out. In this case, it is smart to work with a financial advisor who can structure the sale efficiently to avoid steep capital gains taxes.

Both spouses keep the family business. There are situations in which both spouses have invested so much blood, sweat, and tears into a family business, they are not willing to step away even after divorce. If their business relationship remains amicable despite their personal issues, they may consider keeping the business together.

Although this is the most straightforward option financially, it does tend to be less common because many couples find it hard to work together after the romantic relationship ends.

Both spouses sell the business. The third option is for both spouses to sell the family business and split the proceeds. Some couples go this route because it allows them to cut all ties and pursue their own business and career interests. However, selling a business takes time, and that will prolong the divorce process.

Protecting a Family Business with a Prenuptial or Postnuptial Agreement

If you are newly married or recently started a family business, divorce is probably not on your mind. However, it is always a good idea to be proactive when it comes to protecting your assets in case of the unexpected. A prenuptial agreement is the most effective way to protect your business.

A prenuptial agreement is a legally binding contract both partners sign before getting married. It describes what happens to income, property, and other assets should a separation, divorce, or death occur in the future. A prenuptial agreement is a simple and straightforward way to protect a family business.

Both partners sign a prenuptial agreement freely, free of coercion, and usually with a lawyer present. Beyond the legal protections provided by a prenuptial agreement, discussing these important financial issues can be quite beneficial for couples. Frank and honest conversations about money early on can help prevent painful conflict in the future.

If you married without getting a prenuptial agreement, you have another option. A postnuptial agreement is similar to a prenuptial agreement but is created after marriage. A postnuptial agreement is a legally binding mutual contract that determines how the family business and other assets will be distributed if the couple divorces or one partner passes away.

A postnuptial agreement can also be used as an update to an existing prenuptial agreement, reflecting changes in income, assets, and the family business during the marriage.

For many married couples, deciding what to do with a family business after divorce is a significant challenge. Both spouses need to decide if they want to keep it in the family, sell it to their ex-spouse, or sell it outright and split the profits. When a divorcing couple owns a business, the guidance of a skilled divorce lawyer and a proven financial advisor is recommended to prevent costly mistakes that may impact the business’ bottom line. 

Morristown Divorce Lawyers at Lyons & Associates, P.C. Help Clients and Business Owners Protect Their Interests During Divorce

The distribution of assets is part of the divorce process. And when a family business is at stake, that process becomes more complicated. The Morristown divorce lawyers at Lyons & Associates, P.C. understand the unique challenges of couples who own a company. We carefully review your situation and explain all your legal options so you can make informed decisions for you, your business, and your family. To learn more or to schedule a free consultation, call us at 908-575-9777 or contact us online. Located in Somerville and Morristown, New Jersey, we proudly serve clients in Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, and Morris Plains.