In the United States, there are 5.5 million family businesses and 85% of start-ups begin with the use of family money. When you have a family business it is a balancing act between the needs of the family and the needs of the business. This puts stress on the marriage.
The stress of balancing work and home can result in divorce, and the stress of divorce can lead to problems with the operation of the business. Read on to learn how to navigate the divorce process when operating a family business.
Dividing the Family Business in a Divorce
When you divorce and have a family business, that business will be subject to the division of property and assets. This means in addition to the decisions regarding your personal property, real property, and the children, you must think about how to handle the business.
How amicable the divorce is and the ability to work together after the divorce is final are important factors in making this decision. A court cannot require you to both continue in the business absent agreement. If both of you will not remain in the business, the person who retains the business will need to provide financial compensation to the other for the value of their interest in the business.
If you both intend to remain active in the business, you would need to have an exit plan, a buy-out agreement. This agreement maintains the family business. In the event you or your spouse decide to get out of the business, the other spouse has first rights to purchase the other person’s share.
It may be logical to simply sell the family business and equally divide the profits. If you are able to secure a quick sale you will then each have the profits to pursue your own business interests. This also allows for a clean cut from the financial bonds of a joint venture with your spouse.
Is There a Prenuptial Agreement?
If you or your spouse had the business prior to the marriage, was there a prenuptial agreement? Review the prenuptial agreement for specifics on the handling of the business in the event of a divorce.
Even if shown in a prenuptial agreement, the attorney representing the other party will scrutinize the agreement. They will review it to see if it was properly executed, including signatures and witnesses.
Colorado law requires prenuptial agreements to be fair to both parties The agreement must include a full financial disclosure by both parties. Reasons the law may deem the agreement to be unenforceable include:
- If either party’s signature was made under duress or by involuntary consent
- If either party did not have the ability to consent with their own attorney prior to signing
- If either signor did not receive an “adequate financial disclosure” prior to signing
- Statements regarding spousal support or legal fees may be unenforceable if found to be unconscionable
- Statements that violate public policy or penalties for filing for a divorce or separation, etc.
The above is pursuant to Colorado’s Uniform Premarital and Marital Agreements Act (UPMAA).
Was the Business an Inheritance or Gift?
If the business was an inheritance or gifted to you or your spouse, it may be considered separate property. This means there may only be a division in the event the business increased in value during the marriage. A determination on this may depend on whether the business assets were commingled during the marriage.
It is possible that the non-inheriting spouse may receive a percentage of interest in the business as part of the divorce settlement. It is likely the spouse to whom the business was gifted will retain it for the purposes of operation.
Generational Wealth Trust
The use of a trust is one way to protect the assets of a family business. If you make a gift to your child of family business assets a trust provides protection. If that child later marries and divorces those assets are not subject to division.
Dynastic wealth allows families to pass money from one generation to the next. This allows the money to grow and protects it from taxes. The trust holds the assets and consists of the grantor/trustor who creates the trust. The trustee manages the trust assets and the beneficiary is the person who benefits from the trust assets.
Trusts can be established to protect your family business assets for your children while at the same time restricting how much money the child is able to withdraw from the trust at any time, providing ongoing protection.
Valuing the Business
If the family business has debt at the time of divorce those debts will be subtracted from the total value of the business prior to division of the interest. The best way to value the business for a divorce is through a business evaluator or forensic accountant. The professional evaluator will review the business tax returns, profit and loss statements, financial reports, and any other financial records to determine company value.
When dealing with complicated assets such as a family business it is important to consult with an experienced high-asset divorce attorney who can provide you with sound legal advice on the best steps to take regarding your business.
You Need an Experienced Divorce and Family Business Attorney
Divorcing with a family business adds to the complexity of your divorce. Each divorce is unique with many areas that add a degree of difficulty in reaching an amicable settlement. These include:
- Division of personal property
- Division of real property
- Division of retirement, pension, and other financial investments
- Division of a family business
- Spousal support
- Child custody, parenting time, child support, and medical expenses
When it is necessary to divide high assets or a family business, you need a law firm that has a business relationship with the experts needed to access your holdings. This includes business valuation specialists, psychologists, and forensic accountants appraisers.
Divorce is an emotional and stressful event for you, your spouse, and any minor children. One solution may be mediation services. Mediation is a process in which you and your spouse sit down with a neutral third-party who helps you work through the areas of contention to reach a settlement without having to undergo a trial.
Some couples desire to work on their own with the mediator, others prefer to have their attorneys present. Generally, this process is more cordial and results in a more mutually acceptable resolution than one made by a judge during a trial.
Saving Family Business Interests
If you are considering divorce and have a family business, you need the experience of a high-asset divorce attorney from Shapiro Family Law. We are familiar with the legal process and steps necessary to negotiate a settlement involving complex financial issues.
Contact the Shapiro Law Office at 303-695-0200 to schedule a consultation. We will discuss all aspects of your divorce, including your goals toward your family business, and work to reach an equitable settlement.