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Divorce rates among married entrepreneurs are as high as ever, hanging between 43% and 48% despite the fact that those rates are declining overall throughout the U.S. Divorce attorneys warn that splitting a family-owned business is a complex affair that often has to be decided by the courts. While some divorced couples choose to maintain co-ownership, most cases play out with either one spouse buying out the other or the former couple selling the business and then splitting the proceeds.
As is the case with most states, New Jersey has an equitable distribution statute. This means that marital assets and liabilities will be divided fairly, but not necessarily equally, if the judge is making the decision. The law also distinguishes separate property from marital property. A business founded by one spouse prior to the marriage may be deemed separate property by the court, but it could also be deemed as marital property due to the finances, labor, and/or skill that the other spouse provided during the marriage.
If a family business is marital property, then it is common to have an independent appraiser evaluate the business. The three aspects that factor into the appraisal are:
Appraisals usually begin with the tangible property, which is the easiest to assess. These assets include inventories, supplies, real estate, vehicles, and equipment. The next phase is assessing the liabilities, which may include rent or mortgages, vehicle or equipment leases, and credit lines. The final and perhaps most difficult step is to assess the intangible assets. The three main types are:
Intangible assets are challenging on two fronts. Assigning monetary values to concepts like patents and brand awareness is an intricate process. In addition, these intangible assets can shape the way the court views the business. If one spouse, for instance, is the face of the business, than that may incline the courts to favor that spouse in the division just as it would if one spouse were responsible for most of the research and development.
According to many divorce lawyers, there are three fundamental approaches to dealing with a business that encompasses marital assets. The couple can continue to own the business jointly as partners. One spouse can buy the other out of the business. Finally, the couple can sell the business and divide the proceeds from the sale.
Co-ownership is a way to avoid splitting the business and continuing to own it jointly. The co-ownership may be an active partnership, or it may involve one primary partner, with the other party receiving ongoing payments from future proceeds. Family lawyers note that this is the least prevalent option. It often creates additional risk for one partner or both, and it’s difficult emotionally to continue running a business with a person when your focus is moving on from them and regaining your independence.
Family law attorneys note that buyouts are by far the most popular way to handle a business during a divorce, and a buyout can take a number of different forms. The spouse keeping the business could pay the other spouse through the business or out of pocket, or the selling spouse may receive a larger share of the other assets being distributed. If the business or spouses lacks the necessary funds and there aren’t enough assets to satisfying the selling spouse, then an alternative option is a structured buyout agreement that happens over time.
Selling the business is the second most common way to handle a family business in a divorce according to divorce attorneys, and this approach is commonly used for other assets as well, such as real estate and valuable art. That said, selling a business presents an additional set of challenges, as it takes time to find a buyer. You may be affected by market fluctuations, and a sale is all but impossible if the couple disagrees on the business’s value.
If a couple can relate to each other in a productive manner, then many family lawyers agree that mediation is an ideal solution. In this scenario, you have a divorce lawyer mediate the negotiations. There are a number of benefits to this approach. It is faster and less expensive, for example, and it gives the couple greater control over the process and preserves their confidentiality. A judge still needs to sign off on the agreement, but that is to ensure that the division is still considered fair.
A collaborative divorce is different from a litigated divorce, although each party still has separate legal representation. Their respective attorneys may negotiate directly, or there may be a mediator that guides the negotiation. This may be the preferred approach when the partners want to collaborate but the business is large and complex. Note that, as with a mediated divorce, a judge will need to sign off on the final agreement.
If a mediated or collaborative divorce isn’t possible, then it will be necessary to have the divorce resolved either through arbitration or a trial, which will involve the courts more directly. A judge will generally begin this process by ordering an independent appraisal of the business. The judge is then faced with the challenge of determining what is a fair distribution of the business. At this point, the couple has much less control, as the courts can make decisions for them, such as requiring the sale of the company.
Judges will look at whether the business existed prior to the marriage. This will affect the percentage owned by each partner, as opposed to starting out with 50-50 for a business created during the marriage. The court will consider how much the spouses were directly involved in the business but also the value they provided. A spouse may have had very little to do with the daily operations but added great value to the business through their technical expertise, for instance. A judge will also look at if either or both spouses could buy out the other, which is a likely scenario if finances allow.
The complexity of the business will also dictate the challenges involved in splitting the business. It is, for instance, much easier to buy out a partner from a partnership or LLC than it is a corporation. There are also tax ramifications to consider, and you may need assistance from a business accountant to help you make decisions that minimize the tax penalties that the partners will incur.
If you are considering separation or divorce and share a family-owned business with your spouse and require legal assistance, Lawrence Law is here to help. We are a New Jersey law firm that has handled numerous divorces involving family businesses, including mediated and collaborative divorces and those that require arbitration or a trial. Our law firm has an office in Watchung as well as one in Red Bank, and if you’d like to have your case reviewed by a family law attorney, you can call us at 908-645-1000 or submit the form on our website.
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