Q: What happens to the family business when a couple gets divorced?
“It’s none of your business” might be one of the more benign phrases a couple might hurl at each other as they navigate the divorce process and its aftermath. And while it may be true with respect to most post-divorce personal matters (like non-cohabitation dating), it is often not the case when the divorcing couple shares a family business.
Failure to plan in advance of a divorce for what will happen to the family business both spouses are involved in in the event of a divorce can leave the divorcing couple with fewer options when the unthinkable does happen. You are getting out of your personal relationship. But what will become of your business relationship?
Prenuptial and postnuptial marital agreements may both be used to plan for the distribution of marital assets and debts, including the family business. As the names imply, a prenuptial agreement is entered into before the couple marries and a postnuptial agreement is entered into after the marriage.
As long as the agreement is fair to both parties and entered into freely and without pressure by both parties, it should be approved by the court. Pennsylvania, an equitable distribution state, favors distributing marital assets and debts fairly, which may or may not be equally.
Pre-and post-nuptial agreements can help ensure your assets and debts are divided the way you want, without the court intervening in the decision-making process. Obviously, entering those agreements before or while you are still happily married may result in more rational, fair, level-headed business decisions that will benefit both parties in the event of a divorce.
Generally, there are three popular options for dividing the family business. First, one spouse may buy the other spouse out of their interest in the business pursuant to the terms of a previously executed Buy-Out Agreement, which generally includes financing provisions for how that ownership interest can transferred in the event of a death or divorce. Second, the parties can continue to work together after their divorce if that is feasible. Failing those two options, the business could be sold and the proceeds equitably divided between the two parties.
If you are contemplating divorce or are in need of a prenuptial agreement or postnuptial agreement, Gary R. Swavely, Jr., Esq. has over 25 years of family law experience and can help you. Call 610-816-6366 to request a consultation. He serves families in Berks County and the surrounding counties from his office in Reading, Pennsylvania.