What To Do When A Divorce Disrupts Your Family Business

01 Oct What To Do When A Divorce Disrupts Your Family Business

Largely due to the rise of the gig economy, the number of small businesses in the United States recently hit an all-time high. Frequently, this business is the primary or only source of income for a family. Additionally, many spouses pour themselves into these businesses. Therefore, from both a financial and emotional perspective, dividing a small business upon divorce is no easy task.

Generally, a small business is community property subject to equitable division. Only the best divorce family law attorney can deal with the dual nature of business divisions. Your family business is much more than numbers on a spreadsheet, and it should be treated as such. 

Determining the Business’ Fate

Electing a course of action is always the first step in the business division process. Options are available other than selling the business and splitting the proceeds. Sometimes the best approach is to do nothing, at least from an everyday standpoint.

Many people are better business partners than they were spouses. So, some spouses get along reasonably well in a professional context, especially if the business has multiple locations and contact is minimized. Business continuity is good for employees, good for clients or customers, and, well, good for business. Business continuity plans usually involve a proportional income/expense split. That division is usually, but not always, 50-50.

A buy-out is another possible option. The business remains and the spouses go their separate ways. Buy-outs do not always involve cash. For example, the Wife might give up her share of the business, or at least become a minority owner, if the Husband gives up most or all of his equity share in the marital residence.

The sell-and-divide approach is probably the cleanest possible break for everyone. Most high-asset divorces last several months or even longer, so employees and clients or customers have plenty of time to find other options.

Assigning a Financial Value

Several different recognized valuation models are available. An outside professional typically uses the business’ income or assets to assign a value. Comparable, or recent similar business sales in the area, often come into play as well.

Frequently, the judge orders such outside intervention, or the parties turn to it themselves if settlement negotiations break down.

As for the assets themselves, most of them are community property. Business goodwill is often an exception. 

If the goodwill comes from the name of the business (Burger King), the goodwill is community property. If it comes from a spouse’s name (Jim’s Burgers), the goodwill is separate property.

Speaking of separate and community property, commingling is sometimes an issue in business division matters.

Assume Husband bought a rental house before the marriage. The wife used a wedding gift from her parents to improve the house. Depending on the additional facts, mostly the size of the Wife’s gift and the rent house’s pre-gift condition, the house could be community property, the Wife’s separate property, or Husband’s separate property. The same possible divisions apply to future rental income.

Business division during a marriage dissolution is frequently complex. For a confidential consultation with an experienced divorce lawyer, contact Navarette Bowen P.C. Our main office is conveniently located in downtown Denton.