Divorce and Family-Owned Businesses

Donna LaScala, CDFA®

President, Comprehensive Divorce Solutions, LLC.

During a divorce, one of the most challenging areas to tackle is division of the family’s assets and liabilities.  Between brokerage accounts, retirement accounts, pensions and the family marital residence, things can get pretty contentious as emotions run high.  What may once have been considered “ours” now gets thought of as “what’s mine is mine” especially when discussing retirement accounts and pensions.  Temperatures rise when one or both spouses take the position that their retirement account or pension is something that he/she “earned” and their spouse has no right to receive any portion of it.  Of course, we know that this is not the case and there are clear ways to define what is marital, what is non-marital, and what portion will be divided according to the rules of equitable distribution.

Furthermore, the issue of who will remain in the marital residence, how long that person is be able to stay there, if and when the house gets sold and who can afford to buy the other out comes up in many situations and, when there are minor children still living at home, it raises many more questions that need to be answered. Many couples opt to sell the marital residence, split the proceeds and go their separate ways in a new location.  This seems like a simpler solution to a complicated problem and can be mentally and emotionally beneficial, allowing both parties to start fresh.

Above and beyond these common scenarios, one of the more complex issues for a couple is when there is a family-owned business. This always presents unique challenges to the clients and their attorneys.  Does one spouse own the company?  Was it passed down through generations within that spouses’ family? Are there sibling partners involved? This issue could certainly throw a monkey wrench into what otherwise could have been a relatively straight-forward financial negotiation. Is the other spouse a silent partner without a day-to-day working knowledge of the business? Normally, if only one spouse is actively involved in the company, the other spouse will be appropriately compensated once a forensic accountant has been engaged to determine the value of the business and the marital portion to be awarded to the non-owner spouse.

However, the situation may be more complicated when both spouses are owners AND hold important positions within the organization.

What happens if both spouses are vital to the ongoing success, profitability, and value of the company? Will they be able to work together in the future? They and their advisors must weigh advantages and disadvantages of trying to divide the corporation between the spouses versus having them continue to work together, IF that’s even a viable option. Can they continue to work together? Should they? Is either spouse so indispensable that the business would suffer irreparable damage due to their departure? Will the profitability and viability of the business suffer if one spouse leaves? Can the remaining spouse buy the other spouse out of their share? Is there a buy/sell agreement in place? Is the company an asset that can be sold or is it a business that is dependent on the intellectual capital of one or both of the spouses?  And, let’s not forget liabilities! Is the business in debt? Is this debt the responsibility of one or both parties in the marriage? Is there cash available? All of these questions need to be addressed before a determination can be made regarding how the business will be handled as an asset.

With all these questions needing answers, there is some positive news. The loss of value due to the departure of one spouse after divorce can be temporary.  The health of the company may actually improve after the spouses have gone their separate ways… just like ending a bad marriage might improve the lives of the now separate individuals.  Neither scenario is out of the realm of possibility … it all depends on the individuals involved and the compromises that can be reached during negotiations.