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What happens to your family business when you divorce?

If you and your spouse own a family business but are now contemplating a California divorce, determining what to do with that business likely is one of your major concerns. As you probably know, California is a community property state, meaning that you and your spouse own all your marital assets, including your business, jointly.

California requires that in a divorce, marital assets must be divided fairly and equitably between you. This does not mean, however, that you must divide your business strictly 50/50. You have other options as well, the main three being as follows:

  1. Sell your business and divide the proceeds between you
  2. One of you buy out the other’s share in your business
  3. Continue to own and operate your business together

As you might expect, each option has its own advantages and disadvantages. The ultimate decision as to which option is best for you and your spouse may rest not only on the value of your business, but also how attached each of you is to it.

Sale

Selling your business may be the most straightforward option if both of you are ready to move on to new things. Assuming your business sells reasonably quickly, its proceeds should give each of you a substantial influx of cash with which to do whatever you please, perhaps including starting new businesses.

Before you can sell your business, however, you will need to determine its overall value, the value of each of your shares, and the selling price. This may well entail needing to hire a professional business evaluator. Depending on your business’s size and complexity, the fees associated with a professional business evaluation could be substantial. In addition, depending on the current health of your local commercial real estate market, you could have to wait several months for a sale to take place.

Buyout

If one of you has a particular attachment to the business while the other would be just as happy to walk away from it, a buyout could be your best option. Here again, however, if you and your spouse cannot agree as to its overall value and the value of your respective shares, you may need the services of a professional business evaluator.

Once you determine these values, the staying spouse has three basic options as follows when deciding how to pay for the buyout:

  1. Exchange other marital property for the value of the leaving spouse’s share
  2. Obtain investment capital and/or a new business partner to provide the funds to pay the leaving spouse
  3. Obtain a business loan with which to pay the leaving spouse over time with interest

Continued joint ownership

It may seem counterintuitive to consider continuing to jointly operate your business after your divorce, but some couples find this the best option. To make it work, however, both of you need to be able to separate your personal lives from your business lives. Assuming both of you feel you can do this, continued joint ownership likely is your best option in terms of the business itself since it keeps running as usual, with no downtime associated with sale negotiations, breaking in a new owner or breaking in a new business partner.

Keep in mind that business partnerships are no more stable than marriages. If you choose to continue operating your business after your divorce, you should have your attorney draw up a formal partnership agreement setting forth the business responsibilities each of you will assume. The agreement also should contain a buyout provision should one or both of you discover in the future that you really cannot work together.

No divorce is ever pleasant or stress-free, no matter how agreeable the spouses may be. Adding your family business on top of all your other marital issues makes for an even more complicated situation.

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