Protecting a Family-Run Business in the Event of a Divorce

 Posted on January 07, 2014 in Main

Divorce has many serious and far-reaching consequences, many of which are well-known: changing the make-up of a family home, altering the amount of time children spend with parents, etc. One area people may not consider, however, is the effect a divorce can have on a family-run business.

The first step in protecting a family business interest is to draft a quality pre-nuptial or post-nuptial agreement which addresses the way a business will be divided in the event of divorce. These types of agreements can include clauses that define and control how businesses are valued. For example, if the business increased in value during the marriage, that profit could be shared by both spouses. But if the agreement states that premarital property (in this case, the value of the business) retains its character, then that profit would not be divided and would remain the non-marital property of the owning spouse.

Pre- and post-nuptial agreements can also protect the business ownership from transferring from one spouse to the other or from being sought as collateral for a spouse's debts.

Other documents that can protect a family business are shareholder or partnership agreements. These documents can also set out how a business will be valued if a divorce ever occurs, as well as how the business will be managed. It will undoubtedly be beneficial to decide these important issues before divorce creates disagreement and contention during the division of property. It may also be necessary to draft additional documents if a business is owned by two or more owners; all owners will have to be consulted and agree to such terms as how the business is to be valued.

A buy-sell agreement specifies how and when a business will be sold. For example, a business may need to transfer ownership if an event occurs like death, disability, or divorce of a partner or owner. In these scenarios, if a partner needs to liquidate his or her interest in the business, the remaining shareholders can have first priority to purchase that share, and the buy-sell agreement will specify the details for doing so. In light of the current relatively high divorce rate, spouses with an ownership interest in a business should seriously consider drafting these types of documents and deciding these important issues either before marriage or at least before problems arise in the marriage.

If you have an ownership interest in a business and are interested in drafting a pre-nuptial, post-nuptial, or other type of agreement or document to protect that interest in the event of divorce, contact MKFM Lawtoday at 630-665-7300. With strategic planning early on, together we can help protect your hard work from being unraveled or seriously damaged in the event of divorce.