Written by attorney Douglas Shaun Kepanis

Keeping a Family Business Intact During Divorce

How spouses handle a divorce can determine the success or failure of a family business. A family business is often the most valuable asset in a couple’s estate, and therefore the subject of heated disputes. Family businesses often have emotional as well as financial value to spouses, who may resist any action threatening the business. In the case of acrimonious divorces, one spouse may deliberately sabotage the business to spite the other.

Safeguarding the Business

The best strategy in the face of a divorce is business as usual. If you’re the business manager, don’t make any business decisions based on the divorce. Nor is a divorce the time to start new ventures or expand the business.

It may be tempting to make decisions that lower the business’ value, in the hopes of negotiating a better divorce settlement. Divorce attorneys in New York (or anywhere else) would tell you this is a self-defeating strategy. If the courts get wind of your actions, the judge may appoint a receiver to manage the business until the divorce is finalized. This leads to hefty receiver fees, and you temporarily lose control of your business.

Whether one or both spouses manage the company, it may be necessary to put the business in trust. This prevents one spouse from selling the business to cause the other pain or financial loss.

If you’re the “out-spouse," who has no say in the business, let the other spouse run the business without interference unless you have evidence he or she deliberately damages the business. The less the divorce affects daily business activities, the better.

Estimating Business Value

Most divorce lawyers recommend hiring a reputable business analyst to judge the value of a family business. The out-spouse may be tempted to overestimate the business value to gain a better settlement, while the managing spouse could try to undervalue business assets. An independent business valuation provides an impartial judgment on business worth.

Again, “business as usual" should be the mantra for both spouses. Don’t try to influence the valuation by changing business habits: a professional business analyst will notice sudden changes in business practices, which could negatively affect you in court.

Divorce, Child Custody and Business Creditors

Whenever possible, keep divorce proceedings private and isolated from business contacts. Creditors, suppliers and clients get very jumpy if they think a divorce will affect business. The result could be loss of revenue and a decrease in the business’s ability to generate credit.

For this reason, the managing spouse should provide critical business information to the other spouse. Not only does this foster trust during a difficult time, it helps prevent word of the divorce spreading. Without access to information, the out-spouse and attorney may dig for information by contacting creditors, suppliers and partners. Once a creditor knows your spouse has hired a lawyer, the creditor is going to factor that information into his or her business decisions.

Settling Accounts

Opting for a collaborative approach to divorce over litigation often helps preserve a family business. Litigation eats time, requiring the business operator spend time in court during business hours. Collaborative divorces have more flexibility with appointments and meeting times. Litigation may also drag business partners and colleagues in the divorce, spreading awareness of the divorce to business associates.

In many cases, both spouses want the family business to succeed and survive the divorce. You may be able to reach an amiable agreement by balancing the value of the business against other assets in the estate.

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