What happens to your family business when you divorce?

Some relationships have multiple ties that bind, such as the husband and wife who also run a business. When the couple divorces, deciding what to do with the company makes a difficult situation even more complex, especially if the business is the couple’s income source.

There are several options available.

The business valuation

A primary factor in determining the fate of a family business is whether it would be classified as separate or community property. If the company started or significantly grew during the marriage, it will likely be considered community property. According to Tennessee’s equitable distribution laws, marital property isn’t necessarily split 50/50. The court will decide what is a fair and equitable distribution of the business based on its valuation and other factors.

If it was a business that one spouse had before the marriage, or it was inherited, it may be classified as separate property. However, if the other spouse contributed funds or helped expand it, they may have some claim on it. A prenuptial or postnuptial agreement about the business would also play a key role in its division.

The first step is to conduct a professional business valuation, including income, assets and liabilities. An appraiser will want to review financial records and future earnings projections. Once the value of the business is established, the spouses will need to decide which course of action is best:

1. Selling the business and splitting the proceeds
2. One spouse buys the other spouse’s share of the business with cash, relinquishing some marital assets or through a structured settlement.
3. The spouses may opt for co-ownership if they have a good working relationship. This arrangement would require a willingness to separate personal emotions from their professional duties. Both parties would need to have a high level of trust and be committed to communication.

Dividing a business is not easy, even when there is no personal relationship between the owners. Seeking professional guidance can help ensure that your legal interests are protected.