How a person can protect a business in a divorce

| Jun 2, 2020 | Family Law |

Many people in New Jersey own and operate family businesses. For some, their success has been the product of years of hard work and careful planning. For others, their business may be a family heirloom which they are now entrusted to manage into the next generation.

Family businesses are divisible in a divorce

In many cases, a divorce can ruin their years of hard work in short order. Most of the time, they will discover that their business is marital property subject to division, meaning that the person’s spouse will legally take an equitable share in the business’s value.

This is true even if the spouse had little to no actual involvement in the operation of the family business.

The end result is that a person who wants to keep his or her family business is going to have to find a way to buy out the interest of his or her spouse.

Without coming up with a viable solution, the only alternative may be either to sell the interest in the business altogether or having to turn over ownership shares in the business to a spouse who may not be qualified to run it.

Is there a premarital agreement?

Many people may have heard of a premarital, or prenuptial, agreement. Indeed, many owners of a family business may have to have one in place should he or she decide to get married.

These agreements can spell out in detail how the business will get divided in the event of a divorce, thereby protecting a business owner from an undesirable result.  Likewise, other contracts, like a buy-sell agreement, may also apply.

Negotiating a buyout

Even without an agreement, an owner who wants to keep his or her business interest outright may be able to convince the other spouse to sell of his or her interest in a buyout. The buyout price will depend in large part on the value of the business, so it is important to appraise the enterprise correctly.

While it may be ideal just to write a check to the person leaving the business, this may not be affordable, especially if the buyer has few other assets that can convert to cash. The buyer may have to work out a payment plan or other settlement or secure a loan.

In any event, it is important that any buyout be structured in such a way to avoid negative tax consequences or future conflict related to the divorce.

Is it possible to work together?

Although it is not the right solution for every case, sometimes former spouses are still able to carry on a business relationship where they can work together. Just agreeing to continue to operate the family business may work when the couple has a relatively cordial relationship and already are both involved in the affairs of the business.

While hopefully this overview can help New Jersey business owners protect their prized business assets, how to best proceed in their divorce will depend on their unique circumstances.