Family businesses are the backbone of many communities. They provide jobs, contribute to the local economy and often represent a cherished family legacy. But when a divorce enters the picture, this cherished asset can become a source of stress and disruption.
Dividing marital property, which often includes a family business, can lead to disagreements, hurt feelings and even threaten the business’s future. Thankfully, there are proactive steps you can take to help minimize the impact of divorce on your own family business.
Maintain clear financial boundaries
Keeping the business finances separate from your personal finances is essential for a smooth divorce process. This means having distinct bank accounts, credit cards and financial records for the business. Avoid using personal funds for business expenses or vice versa. This can simplify the valuation process during a divorce and demonstrate responsible business ownership practices.
Seek a business valuation
When a family business becomes part of a divorce settlement, determining its fair market value is crucial. An objective business valuation can minimize disputes and help ensure an equitable division of assets. Engaging a qualified appraiser experienced in valuing family businesses is highly recommended.
Explore creative solutions
There are several options beyond simply selling the business or one spouse buying out the other. If the business environment is amicable, continuing to operate the company as partners might be possible even after the divorce. A buy-sell agreement outlining exit strategies and dispute resolution protocols can be drafted to safeguard the future.
If one spouse wishes to retain ownership, they can explore financing options to buy out the other spouse’s interest. This option requires careful financial planning and consideration of the business’s cash flow.
An employee stock ownership plan (ESOP) can allow the business to establish a trust that gradually buys out the divorcing spouse’s ownership interest using company funds. This can be a win-win situation, providing the spouse with a fair payout while helping to ensure the business remains independent.
Divorce is a difficult process, but with careful planning and legal guidance, it doesn’t have to spell disaster for your family business. By maintaining financial boundaries, obtaining a business valuation and exploring creative solutions, you can minimize disruption and help ensure your family legacy continues to thrive for generations to come.