Protecting Interests in a Family Business Before, During or After Divorce

On behalf of Douglas Hassinger

Family-owned businesses are crucial to the U.S. economy. More than 80 percent of the business entities in the country are family-owned, and these businesses employ over 60 percent of the workforce. They also account for over 60 percent of the gross domestic product (GDP).

In the tough economy that has followed the Great Recession, these income and employment-generation capacities are more important than ever.

What happens, however, when the principal owners of a family business go through a divorce? Whether it’s a high asset divorce in Atlanta or marriage dissolution of more modest means elsewhere in the country, the impact of a family breakup on the business can be severe.

Making sure such a breakup is handled right requires careful planning and willingness of all parties concerned to be flexible in the pursuit of their goals. This article will discuss ways in which to approach the potential problems and start getting a plan in place to deal with them in the event of divorce.

Helping Family Businesses Survive

At their best, family-owned businesses offer a laudable level of tradition, cohesion, and capitalist market differentiators. The sense of trust and common purpose are irreplaceable when family members work alongside each other.

In a dynamic market economy, that doesn’t mean all of these businesses will survive. Yet over 30 percent of family-owned businesses do make it into the second generation. Indeed, as many as 12 percent survive into a third generation, and about 3 percent into a fourth.

What can you do, as a small business owner, to maximize your chances and minimize the chance of attrition caused by family conflict?

Role of Prenuptial Agreements

For one thing, couples who are co-owners of a business might consider drafting and executing a prenuptial agreement. A prenup can specify which property should be treated as a spouse’s separate property and which should be counted as marital property.

If an ownership interest in a family business is considered marital property – and thus subject to property division in a divorce – a prenuptial agreement can provide direction on how it should be divided during property division if a couple splits up.

To be sure, even if a couple doesn’t have a prenup, they could still sell the business if they get divorced. In financial terms, however, that is asking for a big hit. A family-run business is often a couple’s most valuable asset, but it is also the asset that loses the most value when it must be abruptly sold as part of a divorce property settlement.

What an appropriate prenup can do, then, is to prevent a situation where dividing up the business has counterproductive consequences. In other words, with no prenup or other exit strategy in place, a couple may either have to close the business entirely or sell it to a third party for less than it is really worth.

In short, a prenup can be an important tool. But it is not the only way to protect interests in a family business in the event of divorce.

Protecting Your Interests When Divorce Does Occur

No matter how well you plan, however, sometimes marriages end in divorce. When that happens, and marital property must be divided, the impact on your family business can be substantial.

When interests in the business have to be divided up, it’s often important to get a thorough and accurate appraisal. This is true for several reasons.

For one thing, reasonable minds might differ on what the proper valuation of a given business should be. An objective appraisal by an experience outside professional gives both divorcing parties a fair point of departure in deciding how to divide their interests.

There is also the potentially troublesome matter of acrimonious divorces in which one spouse may have hidden assets from the other. Even if you only suspect that this has occurred, it makes sense to engage a forensic accountant and make sure that the accounting practices used in the business are legitimate and transparent.

Insisting on such an accounting, or on an appraisal more generally, is not laying down a scorched earth strategy in the divorce settlement negotiations. It’s merely a matter of protecting your interests.

Making Sound Decisions

The emotions unleashed by divorce proceedings often make it difficult to keep on an even keel and make sound decisions about what’s best both personally and professionally. A family law attorney can help you identify the key issues and keep you focused on your goals – for your family, for your business, and for yourself.