Finance

Spouses and Business Partners: What Happens to a Family Business During a Divorce

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People working at deskPhoto credits from: Tim Gouw (https://unsplash.com/photos/NSFG5sJYZgQ)

If you look at business magazines, entrepreneurial blogs, and other business-related media, you will find that nearly all experts in the industry warn against working with or hiring family members. Hiring a family member because they have the experience and skill may be acceptable, but for the most part, hiring just because of familial bond mixes business with the personal. From the accusations of nepotism from your other employees, to the expectations of your family member that they’re not just another one of your employees, to the emotional aspect if you have to fire them, hiring family is just not worth the consequences.

Still, that hasn’t stopped spouses from opening small home businesses together and becoming legal business partners. So, when the unthinkable in a marriage happens and the relationship goes south and both spouses decide to divorce, what happens to the business? Assuming there is no prenuptial agreement, there are actually three options: keep the business, sell or dissolve the business, or buy out one of the partners.

 

Keeping the Business, Not the Marriage

Without a prenuptial agreement, it is assumed that assets obtained during a marriage belong to both spouses. If there isn’t anything to divide in a marriage (no property, assets, children, or any obligations), the couple can simply file for a divorce and wait for the court to finalize it. If there is, you’ll need a lawyer to help you negotiate for what is rightfully yours. Luckily, some family lawyers offer free consultation, so be sure to discuss your situation to see which lawyer can best handle your divorce.

Amazon buildingPhoto credits from: Bryan Angelo (https://unsplash.com/photos/FtiXADBTqGY)

Some home businesses turn out very successful that it would be financially unwise to end or leave the business simply because of the high emotions of a divorce. When Jeff Bezos married his wife Mackenzie, they had no prenuptial agreement when he founded Amazon.com, which would make him the richest man in the world. When they divorced in 2019, Mackenzie was thus entitled to half of Amazon’s net worth. However, she recognized that it would be impractical to take away half of their shares and settled for a four percent stake, worth around $36 billion.

It is difficult to end a marriage with someone you thought you were going to spend the rest of your life with. But if you’re willing to end the personal relationship and maintain the business relationship, it is possible to keep the business running together even after you have divorced. As long as you can define your roles in the business, redefine your relationship, manage your emotions, and formalize the agreement that your relationship is now strictly professional, then there should be no problem keeping the business long after the marriage has ended.

 

Sell or Dissolve the Business

This option is ideal if both of you want nothing to do with each other after the divorce and the business is not worth the trouble of buying out your spouse’s ownership and maintaining it on your own. You can either choose to sell the business to someone interested and then split the money evenly, or you can just cut your losses and just end the business entirely.

Photo credits from: Nik MacMillan (https://unsplash.com/photos/YXemfQiPR_E)

If you are selling the business, you need to evaluate how much your business is worth. If your business is successful and you want to profit or at least breakeven, you will need a professional appraiser to value your assets and expected earnings. But, if you just want to take it off your and your ex’s hands as quickly as possible, you may have to sell below its estimated value. Once sold, you don’t have to divide the income from the sale equally and can be part of the divorce negotiations.

On the other hand, if you don’t want to sell the business and just plan on ending and dissolving the business altogether, you still have to consider the profits and losses your business has incurred.

 

Buy Out Your Spouse

If you or your spouse is interested in continuing the company alone, they have to be willing to pay you or buy out your share of the business. By paying you (or you paying your ex), you (or your spouse) are selling your right to the business; after the exchange, you hold no control or right over the business and its profits. Whoever is holding the business after the divorce has the right to take the business in any direction they see fit without seeking agreement from their ex.

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There is no legal settlement you have to provide to buy out your spouse’s share in the business. The fair price would be determined by an appraiser who will analyze how much your spouse’s share is worth. However, you can pay more or less of that amount, depending on your relationship with your spouse at the time of the divorce proceedings. If your spouse wants an amicable divorce and just wants to walk away, you may try to offer them a lower amount (some spouses may even give away their rights to the business for free). But if they know how much the business is worth and they also want a stake in the business (but you don’t want them anywhere near the business), you may have to offer them more money to walk away. Either way, be sure to get it in writing that they’ve signed over all their rights to the business.

 

Out of these three options, the best solution depends on what kind of relationship you and your former spouse will have once the divorce is finalized. If both of you remain amicable and can set aside your personal feelings for a professional relationship, the business can continue with both of you as partners. If neither of you want to be reminded of your partnership, business or personal, it is best to sell or end the business and split the profits and losses. But if you feel like you or your spouse can continue the business but don’t want your ex as a part of the business, you will need to buy out their share.

Dealing with family and business is a tough matter for even the savviest entrepreneurs. But if you’re capable of putting your emotions aside and considering the most financially smart solution, you could protect your business interests among other assets during your divorce.

 

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