How Will My Family Business Be Affected By My Divorce?

A family business may not only represent an extensive investment of both money and time, but it may also be the primary source of income for a couple, and multiple other family members may also be involved in the business.

By Tricia Goostree Updated: September 21, 2022Categories: Considering Divorce, Financial Issues, Preparing for Divorce

The divorce process will often involve multiple types of complex financial issues that must be addressed. A couple will need to take the time to fully document all property they own and determine the monetary value of different assets. 

This will ensure that they can divide all of their marital properly in a manner that is as fair as possible for both parties. All of the sources of income for both spouses will also need to be considered, and this may determine whether one spouse will pay child support and/or spousal support to the other.

For business owners, it is crucial to address these matters correctly. A family business may not only represent an extensive investment of both money and time, but it may also be the primary source of income for a couple, and multiple other family members may also be involved in the business. 

If a couple’s divorce may lead to the dissolution of a business, this can have far-reaching financial ramifications that may limit the opportunities for the spouses, their children, and other family members or employees who are involved in the business. To ensure that matters related to a family business will be addressed correctly during a divorce, a business owner or their spouse will need to consider the following:

Is a Family Business Part of the Marital Estate?

The marital estate includes all assets and debts that a couple acquired during their marriage (which is defined as after the date they became legally married and before the date of legal separation). All marital property will need to be divided between the spouses, although in Illinois, this division does not necessarily have to be an equal split. 

Instead, the state’s laws state that assets and debts should be divided in a “fair and equitable” manner while considering multiple factors that may affect both parties, including their needs, their financial resources, and their contributions to the marriage.

If a business were founded or acquired during a couple’s marriage, it would typically be considered to be marital property, and the spouses will be co-owners, regardless of what legal documentation related to the business says. If one spouse were a business owner before getting married, the business would usually be considered separate property that would not be included in the marital estate. 

However, a person’s spouse may be able to claim partial ownership of a separately-owned business if they can show that the business increased in value during their marriage or that they made contributions to the business, such as investing marital funds in business expansion or working at the business and building relationships with customers.

To avoid confusion about the ownership of a business, spouses may sometimes create legal agreements addressing this issue. A prenuptial agreement created before a couple’s marriage may state that a business owned by one spouse will continue to be considered separate property. 

A couple may also create a postnuptial agreement during their marriage detailing how ownership of a business founded during their marriage will be handled if the marriage ends. These agreements will generally be followed when dividing property during divorce.

How Can the Value of a Family Business Be Determined?

Regardless of whether a family business is considered to be marital property or separate property, it is important to establish the monetary value of business assets. This will ensure that a couple understands the full value of all assets in the marital estate. 

Establishing the value of separately-owned assets will also ensure that a couple understands the financial resources that are available to each spouse, which may inform decisions about how marital property will be divided.

When performing a business valuation, one or more of the following methods may be used:

• Calculating assets and liabilities – This method will produce a “book value” for the business that is determined by adding up the value of assets such as inventory, equipment, real estate,  and intellectual property while subtracting any outstanding debts or liabilities. However, this method may not accurately reflect the true value of a business or how it may increase in value in the future.
• Market value – By comparing the business to similar businesses that have been sold recently, this method can provide insight into how much a potential buyer might be willing to pay for the business. This may be a good valuation method for couples who plan to sell a family business during the divorce process.
• Capitalization of earnings – This method takes into account the current and expected future earnings of the business. It can provide insight into how the business may generate income for its owners, how the value of the business may increase, and the potential profits that could be earned if the business is sold in the future.

How Can Ownership of a Family Business Be Addressed During the Divorce Process?

If a family business is part of the marital estate, a couple must determine how ownership of the business will be divided between them. If one spouse has been more involved in managing the business, they may wish to maintain sole ownership, and they may need to buy out the other spouse’s ownership share. 

This will typically be done by dividing the marital estate in a way that will allow the other spouse to keep assets that are similar in value to the business. However, if this is not possible, the couple may make arrangements for the business owner to make ongoing payments to the other spouse.

Sometimes, a couple may choose to sell a family business and divide the profits earned. Spouses may also choose to keep the business intact and continue working together as co-owners after their divorce. 

However, in these situations, it will be important for spouses to create a working partnership agreement that fully details their roles and responsibilities, specifies how decisions related to the business will be made and provides the option for one spouse to buy out the other spouse’s share of the business in the future.

Contact a Kane County Business Asset Division Attorney

To ensure that matters related to business valuation and division of business assets and other marital property will be handled correctly during a divorce, a business owner or their spouse will need to make sure to work with an attorney who has experience with the complex financial issues that can arise during the divorce process. A St. Charles divorce lawyer can provide guidance in these cases, and they can advocate on behalf of their client to ensure that the decisions made during the divorce process will protect their financial future.