Dividing up marital assets in a divorce can be difficult. Because Colorado is an equitable division state, marital assets are divided fairly but not necessarily equally. This becomes even more complicated when there is a family business and divorce. A family business can be handled several ways, most of which require understanding the business’s value. If you are considering divorce with a family business, contact Colorado Divorce Law Group at (720) 593-6442 to discuss your circumstances and find out what legal options you may have.
How Does Divorce Affect a Family Business?
There are many factors that play a role in how a family business is affected by divorce. Most of them, however, can be expected to involve the interaction of two key elements: the business itself, and the spouses who have shared it.
The spouses and their previous contributions to the business play a significant role in determining what might happen. Each spouse’s contributions are considered in determining their involvement with the business.
Other factors that are considered are:
- Separate property each spouse has
- Each spouse’s economic circumstances
- Who made sincere efforts toward the business
- Who is most likely to keep the business afloat
The business also plays a role in determining what happens. A significant factor is whether the business was started before or during the marriage. The court will also consider whether there are other investors or partners in the business (whose presence might reduce the spouse’s proportionate interest in the business) and whether there is a business succession plan that stipulates what will happen in the event of divorce.
Options and Outcomes for a Family Business in Divorce
There are several ways that a divorcing couple or the court may handle the family business. Some possibilities include:
- Restructuring the Business: One spouse may opt to become a passive or silent partner while the other is more active. They may also opt to hire a third party to handle the business.
- Offset the Value of the Business with Other Assets: One spouse may choose to give the other more of the marital assets in exchange for keeping the business.
- Sell the Business: This is often what people think happens when it comes to family business and divorce. Under some circumstances, selling the business and dividing the money can be the best option.
- Remain Co-owners: If the couple is able to remain friendly and work together, they may choose to remain co-owners of the business and continue operating as business partners even though their marital partnership has been dissolved.
- One Spouse Sells Their Share to an Investor: One spouse may opt to sell their share of the business to another investor. In this instance, the selling spouse may have to pay capital gains tax on the proceeds of the sale.
- One Spouse Buys Out the Other: To keep the business in the family and avoid capital gains tax, one spouse can sell their share of the business to the other spouse. This sale is not considered a taxable transaction, according to the American Academy of Certified Financial Litigators.
How Is a Small Business Valued in a Divorce?
The value of a business may be calculated in any of several ways, depending on the circumstances. Some of the most common include:
- Per Stipulation: If both spouses agree on the business’s total worth, they can assign it a value by mutual agreement and register this stipulation with the court.
- Income Model: In the absence of a stipulation, historical information, and certain formulas can be used to predict what the business’s cash flow and profits are likely to be in the future. This allows an estimated value of the business.
- Excess Earning Model: If the business is relatively successful, then accountants or auditors may compare the income of the spouse(s) working in the business with the incomes of other people in similar positions. If the spouse is making more than the average income, the difference can be used to measure the business’s value.
- Asset Valuation: One of the simplest methods, asset valuation adds up the value of the business’s assets, then subtracts the liabilities from the assets. The remainder is essentially the value of the business. This method will take into account intangible assets such as goodwill as well as tangible assets such as equipment and inventory.
- Fair Market Value: A valuation of the business conducted via this method considers how much similar businesses have recently sold for in an attempt to estimate how much the present business may be worth.
- Expert Valuation: As the name suggests, an expert valuation involves the work of an outside expert, who will review factors such as assets, income, liabilities, inventory, and real property associated with the business. They may also look at the history of the business and its profits, recent and current market trends in the industry, and the value and profitability profiles of the business’s competitors to determine the business’s value.
How Do I Protect My Small Business in a Divorce?
If a small business owner is already in the process of getting divorced, or if they are considering divorce, they may want to consult with an attorney to seek options for legally protecting their small business from divorce. Colorado Divorce Law Group may be able to help you protect your business from divorce.
Some options for protecting a small business against a possible future divorce may include:
- Creating a prenuptial or postnuptial agreement: Prenuptial agreements are signed before marriage while postnuptial agreements are implemented after marriage. When properly crafted, these documents can ensure that a family business remains in the family in the event of divorce.
- Being flexible with other assets: If a spouse wants to retain full control of the business, being flexible with other marital assets may help. By giving the other spouse other marital assets, such as real property, motor vehicles, or other high-value assets, they may be able to keep the business as their equitable portion of the assets.
- Putting the business in a trust: If the business is placed in a trust, it may turn the business into a separate asset rather than a marital asset. Separate assets are not divided during a divorce as they are not considered joint property.
How Can I Protect My Family Wealth From Divorce?
The options for protecting family wealth from divorce are very similar to those for protecting a small business from divorce. However, like protecting the small business, a person concerned with protecting family and generational wealth during a divorce may want to speak with an attorney to be confident that any steps they may take are legal and appropriate.
Options for safeguarding family wealth against divorce include:
- Using prenuptial and postnuptial agreements: Like protecting a small business, couples can sign a prenuptial or postnuptial agreement. Both documents can be legally binding as long as the document is not signed under duress, both parties had the opportunity to consult with their lawyer, the terms are not unconscionable, and adequate financial disclosures were made prior to signing, per the State of Colorado’s Uniform Premarital and Marital Agreements Act (UPMAA).
- Placing assets in an asset protection trust: Assets placed in a trust are considered separate property. Not only can it possibly protect family wealth during the grantor’s marriage, but it can also allow them to pass the family wealth on to their children and grandchildren without it being considered marital property in any future divorce.
- Creating provisions in the family business by-laws: Businesses often have by-laws or business succession plans that outline who can have an interest in the business. By creating by-laws that stipulate that wealth and interests cannot be distributed to non-family, it is possible to avoid a spouse gaining family wealth or interest in a family business upon divorce. These by-laws must be carefully crafted to ensure their legality, so it may be appropriate to speak with an attorney.
Are You Concerned About the Family Business During a Divorce?
If you are getting divorced, or considering a divorce, you may be worried about protecting the family business. Family business and divorce can be complicated and confusing, particularly if the business was started during the marriage. If you want to protect your family business during your divorce, contact Colorado Divorce Law Group at (720) 593-6442 to discuss your legal options.