How to Navigate Divorce in Your Family Business
This is a guest post from Jori Hamilton (see bio at the end) – a difficult topic, but one that’s worth thinking about for a lot of business owners.
Divorce is sure to change your life on many fronts, especially if you own a family business with your soon-to-be ex-spouse.
A family business is difficult to both value and distribute, as a variety of factors will come into play. If you don’t have the right plan in place, you could make a mistake that costs you time and/or money in the future. Not to mention the fact that it can also affect your career.
Even if you’re confident that your marriage will last forever, don’t overlook the power of a prenuptial agreement. With this in place, not only are assets protected, it makes it easier to divide mutual assets, such as a family business, in the event of a divorce.
The First Step
There’s a lot on your mind when divorcing your spouse, and if you own a business together, placing a value on it should be at the top of your priority list.
If you hire a third-party appraiser, you’ll end up with an unbiased valuation that provides a foundation for future discussions. This is especially important if you have never had your business valued before.
With a clear value established, you can turn your attention to the three primary options for dividing your family business.
1. Sell the Business and Split the Proceeds
This is a difficult decision to make, but it’s often the best way to move on from your business relationship.
The primary issue with this approach is that selling a business will take an undetermined amount of time. It could take days or weeks. It could also take months or even years.
The longer the sale takes, the longer the divorce process will drag on. And while that happens, both individuals must find a way to respectfully work together.
Should you decide to go down this path, here are some key questions to answer:
- What is the value of your business (see above)?
- What will your total proceeds be after the sale and any related fees and expenses?
- What’s your next career move? Will you start another business? Find a more traditional job? Retire?
And don’t forget how your conduct is perceived when at work. The way you act toward your spouse—and vice versa—will affect more than your personal relationship. It’ll also affect your team’s performance.
Remember this old saying: How you do anything is how you do everything.
2. One Spouse Keeps the Business
This is a common option among divorcing couples, as it allows you to go your separate ways.
Generally, the spouse who manages the business buys out the other person’s interest. This is based on the appraised value.
For example, if the business is worth $1 million, both individuals have a $500k stake. If you’re the one keeping the business, you owe your ex-spouse $500k.
The question you need to answer is this: How will you pay your ex if you don’t have the liquid assets to do so?
This is why it’s so important to prepare for the possibility of changing ownership before you go into business together. This applies even if you don’t see divorce in your future. At some point, one of you might choose a new entrepreneurial path.
Regardless of why the business partnership dissolves, you have options, such as:
- A settlement note that allows you to pay the money over a predetermined period (this is similar to a bank loan, which is also an option).
- The company buying back your ex-spouse’s shares.
- Combining assets, such as funds in your savings account and stocks and bonds.
Before you decide in favor of this overall strategy, consider the potential tax impact. For example, if you don’t structure the deal appropriately, you could end up owing capital gains taxes.
3. Both Spouses Keep the Business
From the outside looking in, this appears to be the easiest option. There’s no money involved since you’re keeping the business in the “family.”
However, as you dig deeper, you’ll find that potential challenges are waiting:
- You will have to communicate with each other regularly regarding the business.
- You may have to spend time together, so remaining respectful is critical.
- If your employees are aware of your situation, it can make for awkward tension at the office.
Also, since you’re divorced and may not be seeing eye-to-eye, it’s easy for this to spill over into your business.
For example, you may have one idea about how to approach the pandemic at your office, while your ex-spouse has another. When this happens, you put your employees in the middle, and that’s not healthy for anyone.
If you decide in favor of this approach, add a code of conduct for the two of you to your existing code of conduct for employees. If nothing else, this gives both of you a clear idea of how to behave moving forward.
How to Decide
At this point, you have a better understanding of the three most common ways to navigate divorce in your family business.
With pros and cons associated with all three options, making a final decision is still easier said than done.
Here are some tips that can help you make an informed and confident decision:
- Talk to your spouse about all three options, sharing your feelings on which one you think is best.
- Listen to your spouse’s feedback, as tuning them out will only drive a larger wedge between the two of you.
- Don’t hesitate to obtain a third-party valuation of your business (you’ll need this eventually, so the sooner the better).
- Talk to your family law attorney, financial planner, and tax professional about the impact of all three options.
The one thing you want to remember is that there’s no simple solution. It can take a good amount of time and planning to reach a point where you’re comfortable making a decision.
Once you and your soon-to-be ex-spouse agree on how to proceed, you can begin to plan for the future. Maybe that means thinking about the next business you want to start. Or maybe that means learning to run your business alone, as your ex will no longer be involved.
The second you decide to divorce is the second you should turn some of your attention to your family business. It can be a long, hard road with various challenges standing in your way, but there’s no turning your back. You need to do what’s best for you, your business, your finances, and your future.
Jori Hamilton is an experienced writer residing in the Northwestern U.S. She covers a wide range of subjects but takes a particular interest in covering topics related to business productivity, marketing strategies, and HR solutions. To learn more about Jori, you can follow her on Twitter and LinkedIn.
Shawn Kinkade Kansas City Business Coach