Family Businesses After a Divorce: What Happens?

Property division is one of the most stressful components of a divorce settlement and can be even more complicated if a business is involved. While no couple plans on getting a divorce at the beginning of a marriage, situations can change unexpectedly, and it’s encouraged for each party involved to be fully prepared. Given that Minnesota follows equitable distribution, it’s crucial to be proactive and, if possible, establish an agreement regarding the disposition of a family business.

Determination of Valuation

If two spouses going through a divorce own a business, it is essential that the company is valued for property division purposes. It is important to find an attorney experienced in business valuation as every situation and business is different. It is important to find an attorney that works with business valuation experts on a regular basis.  In Minnesota, the business valuation expert  will review a variety of factors to assist in accurately determining the value of the company, including, but not limited to:

  • Accounts Receivable
  • Business Goodwill
  • Equipment
  • Intellectual Property
  • Cash Flow
  • Inventory
  • Revenue 

Determining the value of a business can be subjective, meaning the considered details aren’t necessarily clear-cut. If the business is family-owned with few or no shares publicly available, it can be challenging to determine a value due to the lack of comparable businesses in the marketplace. Some spouses that are already part of an established family business may choose to sign a prenuptial agreement to benefit both parties should a divorce arise.

Division of Business

The state of Minnesota follows equitable distribution in divorce settlements, which means that the courts will divide property between spouses based on fairness. What is determined as “fair” may not always be an equal (50/50) distribution of marital property.  In some instances, the business may be awarded to one spouse while the other spouse receives a monetary share of half of the company or other assets of equal value. The courts will often consider when the business was started, how much money, if any, was put back into the company during the marriage, and how often one or both spouses were  involved with the company. There are many resolutions from which spouses may choose to reach an agreement during the division of a business:

  • Selling the business and equitably dividing proceeds
  • One party buys out the other thus leaving the company to one party
  • Establish a contract to share profits and expenses for the life of the business

Sometimes, parties may also choose a combination of the above-referenced options. Depending on the size of the marital estate, it may not be possible for one spouse to “buy out” the other spouse using their current marital assets. In those cases, a spouse may have a period of time to make payments to the other spouse to buy them out of their interest in the business. 

Business Started Before Marriage

If the business was started before marriage, and one or both parties continued to work at the business throughout the marriage, the company may have both marital and non-marital assets. There are instances in which  the judge will consider the business to be commingled property, primarily if marital funds were used for maintenance and improvements. In those instances, it is important to obtain expert analysis to trace the non-marital and marital components of the business.

Business Started During Marriage

If the business was started during a marriage, and the involved parties have resided in Minnesota, the company will be considered marital property. Marital property is presumed to belong to both parties. A business considered to be marital property will be counted as an asset and  factored into the final divorce settlement.

Protect Individual Interest

If owning a business  is of interest for one or both parties in a marriage, there are many steps the couple can take before and during a divorce to protect individual rights to the business. Remaining transparent and willing to negotiate are essential qualities for each spouse to adapt and incorporate into the process.

  • Forward Thinking: While no couple plans to  pursue a divorce at the start of a marriage, unexpected changes can happen. It is often helpful to have a plan in place through a prenuptial agreement, shareholder agreement, or a buy-sell agreement if owning a business with a spouse is a possibility. These legal documents will help both parties determine what will occur should a divorce happen. Both parties should have the documents reviewed by individual divorce lawyers to ensure each spouse’s legal rights are protected in full.
  • Retain An Attorney: If a married couple is already planning to file for divorce, it’s encouraged for each party to hire skilled divorce attorneys that are experienced with business valuation and division. 
  • Hire Experts: In most instances, parties choose to hire a business valuation expert such as a certified public accountant (CPA) or certified valuation analyst (CVA). These individuals will accurately value the property in question. Often, the attorneys each party selects for assistance will have a network of quality professionals for each spouse.

Contact a Business Valuation and Division Expert Today

Divorce is a demanding time for couples, and determining property division can be even more stressful, especially if a business is involved. While it may seem daunting to establish an agreement in the instance a divorce occurs, both parties will be better served if early agreements are reached. Before hiring attorneys and business valuation experts, it’s encouraged for both spouses to ask questions and ensure that the chosen attorney is knowledgeable about business valuations. That will help both parties to be prepared and knowledgeable of what occurs during business valuation and division.

This article contains general legal information and does not provide legal advice. For legal advice, please contact M. Sue Wilson Law Offices directly.