The Implications of Divorce for Business Owners: Protecting Your Assets and Your Interests
The stresses and strains of running a business can take their toll on a marriage. One study found that business owners are 64 percent more likely to prioritize the success of their business over their romantic relationships. In those cases, the marriage is probably in trouble. It is certainly not definitive that owning a business inevitably leads to divorce. I know plenty of successful business owners who have thriving marriages.
For those where divorce becomes a reality, keeping the business afloat and protecting assets can be a challenge. A recent survey revealed nearly one in 20 business owners end up having to shutter their operations due to the financial burden of divorce. Another study concluded that 57 percent of business owners experienced negative financial impacts on their businesses as a result of divorce.
That is why it is important to consider the implications of divorce on the business.
When the Family Business Becomes a Point of Contention
When a couple divorces, the family business often becomes one of the biggest sticking points. In most cases, it is treated as marital or community property. There are two issues that come into play. One is to determine whether the business is the separate property of one party, community property, or separate property with a community component. Two is to value the business, and once valued, to equalize the division for the other spouse. Assuming the business is community, the latter is fairly simple if the business is small compared to the rest of the marital estate. In such cases, the court often awards the business to the spouse who is best suited to run it and adjusts the rest of the assets, awarding the business asset to one spouse with an equalization to the other. But when the business represents a major part of the couple’s wealth, coming up with a mechanism to pay the equalization payment can be complicated.
Because divorce laws vary by state, the rules depend on where you live. In many states, anything you owned before the marriage is considered separate property. Still, if the business grew in value during the marriage, the increased value may be community property, depending on whether the business growth was due to market forces or because of the skill of the owner.
In community property states, everything is typically split 50/50. In such states, the most significant consideration for the parties is making sure the court does not overvalue the business, which could skew the division. In equitable distribution states, the court has more flexibility. Instead of an even split, a judge might determine that a “fair” division is 70/30 or even 100/0, depending on the circumstances, but often the spouse who runs the business receives a larger share than the spouse who does not.
The Challenges of Valuing a Business
A business owner has a lot to consider when running a business, including the need to keep sufficient cash on hand to operate the company on a day-to-day basis. However, when business assets are divided in a divorce, the operating cash will be included in the value of the business. However, it is a common argument for the “out spouse” to make that the business does not need to hold onto that much cash and thus some of the cash needs to be divided. This is an example of one of the many business challenges divorce presents.
Another is the valuation of the business itself. In California, businesses must be valued as a going concern today, and not what it might be worth in the future. Certain types of businesses, such as a legal practice or a medical practice, are fairly straightforward when it comes to valuation. But other businesses are more difficult to value. For some, a lack of data makes it difficult to compare to other similar businesses, which increases the challenge for an appraiser. Each side will typically have its own appraisal, and all too often, the value they come up with is quite different. Then it is up to the parties to compromise on the value, or it is left for the court to decide.
Coming up with a plan to pay the equalization payment is often a challenge. The numbers may be so high that it is not possible to pay. Key components are: 1) the amount, 2) the interest rate for payments made over time, 3) security for repayments, and 4) tax protections for the spouse being bought out of the business.
Safeguarding Business Interests with Prenuptial or Postnuptial Agreements
When both spouses are co-owners of a business, the key to protecting the company during and after a divorce is careful planning and clear agreements. If both parties want to remain involved in the business, they will need to approach it like any other professional partnership. That usually means revisiting or expanding the company’s Operating Agreement to spell out roles, responsibilities, decision-making processes, and the handling of disputes and compensation. Corporate attorneys can help formalize these updates to ensure they are legally sound and practical. It may also involve restructuring ownership, such as creating separate classes of shares, adjusting compensation, or defining who manages what areas of the company in order to keep operations running smoothly even if personal relationships change.
If one or both spouses want to protect the business from potential disruption, prenuptial or postnuptial agreements can be essential tools. These agreements can specify that the business, or its future growth, will remain separate property and outline what happens to ownership in the event of divorce. Many business owners even require a spouse to sign a waiver agreeing not to claim an ownership interest in the company, but that may not be dispositive in a divorce. Without such an agreement, the business may still be considered a community asset in many states, leaving it vulnerable in divorce proceedings. Even for couples who did not have a prenup or started their business after marriage, working with legal counsel to create a clear business structure and ownership plan can help preserve both the company and the working relationship.
Smart Divorce Strategy: Preserve Value, Protect Reputation, and Move Forward
Divorcing spouses who share business interests should prioritize privacy, cooperation, and professionalism to protect the company and its reputation. Mediation or collaborative law approaches can be used to keep proceedings private and allow couples to reach agreements without exposing sensitive business information in court. While some filings are still public, working through mediation or collaborative divorce can help minimize exposure and maintain confidentiality.
Effective communication and business continuity go hand-in-hand. When spouses communicate, avoid unnecessary litigation, and agree on a plan, whether to continue working together or arrange a buyout, the business is far more likely to survive and thrive. It is also essential to keep employees, clients, and vendors out of the dispute; maintaining professionalism preserves trust and stability.
Because dividing business assets often carries significant tax consequences, bringing in tax attorneys and forensic accountants early can prevent costly mistakes and ensure equitable, tax-smart solutions. Above all, business owners should approach divorce with the goal of resolution rather than combat—keeping expenses low, focusing on resolution, and limiting public filings. These steps not only safeguard the business but also lay the groundwork for financial stability and a smoother future.
Please note: The content and views expressed here are my own and do not reflect or represent the positions, strategies, views, or opinions of Blank Rome LLP.