Divorce can derail a California family business

Starting a company is often a ground up enterprise. Many couples start companies together playing off each other’s strengths. A great idea that starts small may grow into a company that requires operations or management experience that a spouse brings. Soon a family business may be thriving and providing a comfortable income.

Approximately 65 percent of companies in the U.S. are family owned. Glenn Muske, a North Dakota State University professor who researches couples in business, estimates spouses co-own about 30 percent of those businesses. Unfortunately, the National Center for Health Statistics estimates 40 to 50 percent of first marriages end in divorce, which means divorcing couples need to address business valuation and division.

Because it is not common for ex-spouses to stay in business together, couple-owned businesses do not usually weather a divorce. A sale of the company might allow the spouses to split the equity and start new solo endeavors. In other cases, one spouse will buy out the interest of the other and continue to lead the company individually.

Prenuptial agreement of shareholder agreements provide a roadmap

One Chicago woman questioned CEOs of companies that failed and found a common theme. Divorce was the downfall of quite a few. Before starting her own health care consultancy, she invested in a detailed shareholder agreement. When she later divorced and had partners move on, the agreement helped her keep the business afloat.

When an owner of a successful business gets married, a prenuptial agreement can detail future property rights in the company. In California, a valid prenuptial agreement requires the following:

• A written agreement signed by both parties
• Each party must have the ability to consent – for instance, prenup discussions should not take place after a night of drinking or days prior to the wedding
• The agreement must generally be fair – a bias toward one party may mean that a court will not uphold the agreement

California courts generally follow valid prenuptial agreements, however, if the above requirements are not satisfied it might provide an additional point of conflict. A shareholder agreement or buy-sell agreement can also detail what rights each of the spouses have in the event of a divorce.

How much is the company worth?

Business valuation and cash flow issues are often a point of conflict. It is usually necessary to hire an expert to value the business. Often a neutral firm can conduct an analysis, but it may be necessary for each spouse to retain his or her own expert. Valuation of the company will affect the overall division of assets. When the parties cannot agree valuation, it is often not a great idea to split the business in half.

A family law attorney can discuss how a divorce will affect a business and assist in drafting a prenuptial agreement. When a marriage breaks down, the assistance of a lawyer can ensure that a company you worked hard to build survives the divorce.