Why you should not share a family business in a divorce

With many resources and assistance available, starting a business in this country has gotten easier. Recent studies share that family-owned operations make up about 19 percent of small businesses in the United States. Many of these organizations began as passionate collaborations between husband and wife. In the unfortunate event that the marriage falls apart, what happens to the business?

When both parties have equal investment in the future of the business, it can be difficult to agree on a settlement. If the breakup is amicable, you may be able to continue joint ownership with your ex-spouse. However, in most cases, it is better to sell the business or have one partner buy out the other. Here are three reasons why.

1. Equity is murky

When you start a business with a professional colleague, you usually draw up a contract to determine how much each partner owns. You divide the equity into clear percentages and neither individual can touch the other’s share. Because a married couple typically shares their money, there is never a need to determine who has the right to what shares.

The attempt to separate something you formed in a union is tricky. Who put more money into the company? Who invested more time and labor? Coming to an agreement on these facts retroactively can make negotiations heated and hostile.

2. Valuation is unknown

In divorce settlements, it is important to establish whether property is an asset or a liability. With a family-owned business, this differentiation is often unknown. The amount of debt on the books, along with outstanding payables and receivables can make it challenging to assign a set figure to the business’ value.

The process of buying or selling shares between both parties initiates an appraisal process that you may not take time to do otherwise. This information can reveal some startling facts that make it easier for one spouse to let go. In the state of Texas, when one partner is removed from an LLC, it is not necessary to file with the Secretary of State. This eliminates some of the hassle associated with transferring ownership. 

3. Family tension is high

Businesses, much like marriages, are partnerships. If you and your ex-spouse were unable to make your personal union work, you may carry the same animosity into your professional relationship. If the two of you have kids together, this can put an even bigger strain on how you relate to your children. Adult sons and daughters may even need to intervene for the sake of the business, especially if they expect to take the reins someday.

Ultimately, the conclusion you come to will depend on the nature of your relationship with your ex-spouse and the state of the business. In most cases, however, having one party step down is the smart decision.

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