When Business Owners Divorce

July 03, 2017

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While a divorce is a difficult and painful process under normal circumstances, it can be especially stressful and complicated for business owners. These issues are even more complex if both spouses own the business.

As a practical matter, the business needs to continue operations while the divorce process unfolds.  

Plan ahead

There are some steps you can take long before a divorce is imminent to protect your company’s interests and your interests.  

  • Company operating agreements or shareholders’ agreements frequently contain buy-sell provisions addressing what happens in the event of a divorce.  
  • A Buy Sell Agreement specifies how the ownership interests of the business will be reacquired by the business owners or the company in the event of a divorce.  
  • A premarital agreement defines how assets and debts of the couple are allocated in the event of a divorce.

Managing a business during a divorce

Going through a divorce is a huge distraction for a business owner and takes tremendous time and energy away from running the business. It is also distracting for employees, who are concerned about the future of the business and their jobs.

Business decisions

If both spouses work at the company, it is especially important to put agreements in place regarding each spouse’s rights, duties and responsibilities regarding running the business. If both spouses can explicitly acknowledge their mutual interest in keeping the business healthy and use a divorce process that allows for the orderly, planned use of time and resources, they reduce the impact of the divorce process, to the extent possible, and present a solid, controlled picture of the business to third parties and employees.

Confidential information

Most business owners want to keep information about the operations of the business to remain confidential. The divorce process may expose the confidential inner workings of the business to public scrutiny. Court records, including testimony and exhibits regarding business operations, management and valuation, are public records. Work with your attorneys to limit the disclosure of confidential information.  

Who gets the business?  Is the business community property?

Depending on the facts and the law of the governing jurisdiction, your business may be a divisible marital asset. In Texas, the first step is to decide whether the business entity is community property.  Some important questions include:

  • Did the business start before the marriage?  
  • What was the source of funds used to start the business?  
  • Did the business change formations during the marriage?  
  • Were any community funds put into the business during the marriage?  

Even if the business is determined to be separate property, the increase in the value of the company during the marriage resulting from management efforts by the owner spouse may be deemed community property.

If it is determined the business is a marital asset, the divorce determines who will be awarded that business. While it is possible to have both spouses awarded a share of the business, as a practical matter it is pretty difficult for most people to continue running a business with their former spouse. A much more likely result is that one spouse will be awarded the business (typically the spouse more involved and essential to the functioning of the business), while the other spouse’s interest will be bought out.

What is the value of the business?

The value of the business depends on many different factors, including the amount of assets the business has, properties that the business own, current customers, intangible goodwill, as well as other financial information. There may be documents with buy sell provisions or a Buy Sell Agreement that specify formulas or guidelines for determining the value of the ownership interests. Otherwise, it may be necessary to hire a professional business valuation expert to evaluate the business and prepare a report analyzing the business and appraising its value.

Structuring the payout

In most cases, it would be crippling to a business’s cash flow to have to pay out the amount to acquire the departing owner’s interest in the company when the couple’s assets are divided by the divorce decree. Typically, the business will need to structure the payout to the departing spouse over several years.  

Conclusion

The issues involved when a business owner goes through a divorce are more complex than in a divorce where the parties are employees with standard assets, such as bank accounts, real estate, 401(k) plans, and vehicles. It is important for business owners to work with a good divorce attorney and a good business attorney to develop the best approach to the divorce process and to protect and preserve the business.

Business legal issues are complex. Business owners should consult with their legal and tax advisers on such matters. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Topics: Legal

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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