Dividing a Family Business in a Divorce

Dividing Family Business Can Be Painful, Difficult

Small family businessAccording to a recent census report, there are almost four million businesses in the United States that are jointly owned by husband and wife. In those states with community property laws, it has been common for courts to hold that the business of either spouse is community property, and must be divided equally. As more and more women are building and running successful businesses, courts are ruling that they must share the proceeds of their success in a divorce.

Legal and financial experts say that, particularly when the parties to a marriage already have their own business, a “business prenuptial agreement” is the best way to avoid potential problems. Many, however, say that business interests should now routinely be addressed in a prenuptial agreement. With a valid prenuptial agreement, a party to divorce need not worry about the loss of value in a business upon divorce.

Without a valid prenup, though, the inclination is almost always to resolve the problem of dividing the business by having one spouse buy out the other spouse. The challenge with that option, though, is how to determine the buyout price. Legal experts recommend that parties have a professional valuation of the business–each party can have his or her own valuation done, or they can agree on a third party business valuation expert. In many instances, once the value of the business is determined (and agreed upon), the parties can complete a buyout without an exchange of cash by allocating other marital assets accordingly. If the other marital assets are insufficient to compensate a party for the buyout, payments may be set up on an installment basis, or (worst-case scenario), the business may have to be sold, with the proceeds divided accordingly.

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Montgomery County Bar Association
Pennsylvania Bar Association
International Academy of Collaborative Professionals