According to SCORE, families own approximately 20% of small American businesses. When a married couple runs a business together and decides to get a divorce, this can present several emotional, legal, and practical difficulties for the couple to overcome to continue running or split the company in a manner that pleases both parties. Understand the ways of managing divorce in family-owned businesses, and learn how a knowledgeable South Carolina family law attorney may help individuals with their specific business-related issues in a divorce; call King Law Offices today at (888) 748-KING to organize a consultation.
Understanding Divorce and Family-Owned Firms
The total number of divorces, which involves formally ending a marriage, amounted to 673,989 in the United States, according to statistics from the Centers for Disease Control and Prevention (CDC). Family-run companies are firms where a single family typically owns more than half of the business’s shares, giving the family a controlling stake; often, these companies pass between several generations, but many also arise as a result of a business idea shared between a married couple. When an owner of a family-run firm experiences divorce, this could have a significant impact on the company since a court could view the firm as an asset to split between the couple during divorce proceedings, depending on the business’s structure, the company’s location, and whether one spouse originally owned the business or both of them established it together.
How To Split a Family Business in a Divorce
Splitting a family-run business in a divorce first involves seeking an appraisal via an impartial third party. Then, the couple can typically choose between three options, as explained below.
One Spouse Acquires the Firm
A common option that can have tax advantages, this approach typically entails a spouse who primarily runs the company to buy the stake held by the other party, ascertained by determining the business’s appraised value. If the spouse buying the business lacks the assets to make the purchase immediately, it is usually possible for the couple to organize a payment plan as part of the divorce settlement. Another approach is to have the business purchase the shares of the spouse leaving the business, although, without structuring the sale carefully, this can lead to the incurring of capital gains tax.
Both Spouses Continue Running the Company
This can be financially favorable to both parties, and if the spouses have an emotional attachment to the company, they could try to learn how to work together, despite their relationship breakdown, to stay involved in the business. That said, this can be a challenging solution that may not be viable for many individuals, particularly if the couple did not end their relationship amicably.
Both Agree To Sell the Business
Another option involves both parties agreeing to sell their stake in the company and share the proceeds. The benefit of this approach is that it enables the spouses to seek completely independent ventures, such as establishing a new company. However, selling the firm may take some time and can lengthen divorce proceedings; during this time, the spouses need to decide whether they can work together until they sell the company or agree on one party running the business until they can sell it.
Learn more about effectively managing divorce in family-owned businesses, and find out how King Law Offices can assist someone considering divorce who jointly owns a company with their spouse. Contact our firm today to discuss your legal matter with an experienced South Carolina divorce attorney.
Is My Spouse Entitled to Half My Business if We Divorce?
How a court divides a business during a divorce depends on state laws. For instance, in South Carolina, the courts divide marital assets, including business holdings, using equitable distribution, which involves splitting assets fairly but not always equally, taking into account who established, grew, and ran the company; they may decide to award the company to the spouse chiefly responsible for running it, granting the other party with other assets in exchange, or they could split the company equally between two spouses who ran the company together. In community property states, the courts typically consider companies established during a marriage as assets that each spouse owns an equal share in, whereas with businesses started prior to marriage, whether the court considers this as a separate asset depends on each spouse’s contribution to the company in terms of funding and running it.
How Do You Value a Business in a Divorce?
Placing a value on a business during divorce proceedings involves establishing an amount that a hypothetical purchaser would be willing to pay to obtain control of the firm. This can be a challenging task, with appropriate valuation methods depending on several factors, including the business type, size, and assets involved, as well as the sector and industry where the company operates. Some of the main approaches are the capitalized future maintainable earning method and net assets method, or a combination of these methods, as outlined below.
Net Assets Method
Often used for larger, asset-rich companies, this method works by valuing a business’s assets, like machinery, equipment, real estate, intellectual property, and stock. After obtaining this value, it is necessary to deduct the company’s liabilities to calculate the firm’s fair market value.
Capitalized Future Maintainable Earning Method
Widely utilized for valuing small and medium-sized businesses, this approach entails determining an investor’s expected return on investment (ROI) when purchasing a company by assessing a firm’s profit sustainability and risk-reward ratio. To gain an accurate valuation using this method, thoroughly review the company’s financials, including historical and current data, as well as forecasts.
Tips for Managing Divorce Involving Family-Owned Businesses
Divorce is a challenging procedure, requiring sensible planning, goal setting, and a willingness to compromise to help the process go smoothly. Here are some tips for effectively handling divorces involving family-owned firms:
- Consider collaborative or uncontested divorce: For couples on amicable terms, pursuing a collaborative or uncontested divorce is a worthwhile option that provides greater asset division control during the process and can be a beneficial approach to couples who want to continue running the business together post-divorce.
- Think about IP: If a spouse agrees to sell their stake in the firm to the other party, consider asking the spouse to sign a non-compete agreement to prevent them from opening a potential competitor, monitor the use of the company’s IP by other parties, and be ready to enforce your IP rights if infringed.
- Utilize trusts: After the divorce, consider utilizing trusts in the future to help safeguard family assets, including business holdings.
Speak to a South Carolina Family Law Attorney Today
Effectively handling a divorce involving family-owned companies requires diligent planning and a thorough understanding of the various legal challenges that could arise from this scenario. Moreover, if a married couple owns a business together and decides to pursue a divorce, there is no single way of resolving the situation; some couples can continue running the business together post-divorce, whereas others may prefer to sell the company and move on with their lives, which requires determining how to split the firm. Acquire a more detailed understanding of managing divorce in family-owned businesses, and explore how a seasoned South Carolina family law attorney from King Law Offices might aid people with their divorce queries by calling (888) 748-KING.