Dealing with Divorce in a Family Business
While a divorce is always an emotional process, it also involves difficult financial decisions. One of the most significant can be what do with your shared business. You may not know what your options are, and even if you do, knowing how to act on your decision can be challenging.
Options to Handle the Family Business After Divorce
Here are some options to consider when trying to determine what may be the best outcome for your family business in the face of divorce.
Should We Split the Business Up?
While your romantic relationship with your former spouse didn’t work out, you may be less certain about dissolving the business side of your relationship. If you think you can work together amicably, there are definite advantages to keeping the business in one piece. No one has to buy anyone out, and you don’t have to disrupt any current workflows at your company. Also, as Forbes points out, if you keep the business together, you can skip a potentially costly business valuation.
If your work relationship has suffered the same fate as your romantic connection, you may have fewer options, depending on whether you want to start over or just change the dynamics.
Buying Them Out
If you want to keep the business but don’t want to work with your former spouse, you’ll need to buy them out. As Forbes states, “Your business is just another asset owned by both of you.” To determine what that value is, you may need to get the business appraised. You can buy them out directly or compensate with other assets.
Selling and Moving On
Another option is to sell the business. You may still want the value of your business appraised so you both get what you deserve for what has been invested into the company together. Once you’ve sold, you’re free to use the money to start a new business, pay off debts, or spend it in any other way you choose. This option provides the greatest degree of freedom in some ways, but it can also take some time to sell, and you’ll have to work together to make that happen. The best option for you will depend on your individual circumstances.
Equitable Distribution and Impact on Alimony
Family businesses can present unique challenges for both Equitable Distribution and matters of Support, Alimony Pendente Lite and Alimony in Pennsylvania divorce cases. For this reason, it may be necessary to obtain an appraisal of the value of the business or the income that the business produces. This appraisal is commonly referred to as a Business Valuation.
To properly evaluate a family business, the valuator will want to review all relevant financial records for the business, including tax returns, profit and loss statements, income statements and balance sheets for multiple years.
Normalizing Adjustments
Because not all businesses are the same (even within the same industry), the business valuator may consider “normalizing adjustments.” Normalizing adjustments are an effort to make an apples to apples comparison of the business in question to similar other businesses.
There are typically two types of normalizing adjustments:
- Type 1 Normalizing Adjustments remove one-time, non-recurring or anomalous items. Examples of Type 1 Normalizing Adjustments may include litigation settlements, asset acquisitions and increases in costs of goods sold or inventory.
- Type 2 Normalizing Adjustments normalize owner and/or officer compensation of a kind that wouldn’t exist in a well run, public company. Examples of Type 2 Normalizing Adjustments include adjustments to owner/officer compensation, travel and entertainment expenses, rent, professional fees, family member and/or related party transactions.
Our Business is Helping You
Are you unsure of the best way to proceed? We can help you decide which option is the best for you and your business and make the divorce process as smooth as possible. We’re here to help at every stage of your divorce, including the division of assets.
Colgan & Associates, LLC is a trusted law firm that focuses on family law matters, traffic matters and criminal defense with offices in Harrisburg (Mechanicsburg), York and Lancaster.
Request a free phone consultation with one of our property division attorneys.
