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Specialty tag(s): Divorce for Business Owners

How to Protect Your Family Business in Divorce

Kyle Basinger | August 26, 2022

Many business owners have a unique set of obstacles that arise when going through the divorce process. For example, business valuation issues and questions about how someone’s interests will be purchased are common for divorcing business owners. However, additional challenges can arise and need to be addressed. Here are a couple of examples.

Unclear ownership interests in the business.  

One of the issues that I frequently see with corporations is that ownership interests are not always stated. Sometimes the owner interests will be stated as jointly owned, or sometimes it’ll say it’s 30%. However, often the exact percentages are not even listed. This can create quite a few problems when parties are going through a divorce, especially when it comes to who has the authority to do what action for the corporation.

It can be costly to buy out the other party.

An additional problem is if one party has 50% ownership, it can be quite costly for that particular party to be bought out. In family businesses, oftentimes, a spouse will play an important role within the company. If one spouse leaves the company due to divorce, it can increase the cost of running the business because you must find a replacement. Their departure can also lead to a loss in the company’s value because of the spouse’s role. The relinquishing spouse will have the issue of replacing the income they’re losing from the family business.

What are the different resolution options?

There are a few different paths you can go down to resolve your family law matter. They are:

• Litigation. Litigation is where you can go to a judge and ask a judge how to divide up the family business.
• Mediation. Mediation is where both parties have attorneys, and you’ll try to reach an agreement together.
• Collaborative Divorce. Collaborative Divorce is an interest-based approach where both parties determine their mutual interests.

How can the Collaborative process help?

Instead of taking positions, Collaborative Divorce allows spouses to decide what their interests are and, together with collaboratively trained attorneys, devise a solution that will work for both of them. One benefit of this is that there are unique issues with the family business, and the court will only see you for a very limited amount of time. Through the collaborative process, you can craft a solution with the people that know the business best. Both parties can decide what their interests are, what they want to take out of the business, and the best way for a person to be compensated in the business. And through a methodical process of collaboration, a mutually agreeable solution can be reached by both.

Here is an example:

I had clients that owned an import-export business. The wife ran the manufacturing side, and the husband ran the sales side. Neither party could do without the other; the wife had all the contacts in the manufacturing realm, and the husband did most of his business overseas with his sales contacts. The business would suffer a huge loss if either sold, partly because neither party had the resources to buy out the other. Additionally, their contacts and the role they played were unique. And so, through the Collaborative Divorce process, they came up with a very innovative solution.

They formed two subsidiary companies, one company was designated for manufacturing, and the other was designated for sales. This allowed each party to run their company the way they thought was best to run it, and they wouldn’t step on the toes of their former spouse while keeping the original company open, which became the parent company.

Both spouses owned 49% of the parent company, and they had a trusted employee who had been in the business for years and then had a 2% interest granted to him. He would be the tiebreaker if there ever was an issue in the parent company. That was a solution that never could have been obtained in litigation. But instead, through collaboration, the solution was decided by the parties. And ten years later, it is still working.

How would a court have likely divided the business?

The solution would have been very different if the parties had gone to court. More than likely, the court would have ordered the business to be sold, which would have been a huge personal and financial loss for both spouses.

The other option is a court could have come up with a business that probably would have been valued in the multi-millions, and neither party had those types of funds to buy each other out, which would have saddled the company with debt for years and years to come. Whereas with the solution we came up with, the company remained profitable. Both parties maintained their living and income source, and the company was not saddled with debt.

Some of the best advice I can give business owners that are going through divorce is to first look at your documents and find out exactly how the ownership interest is stated in your ownership documents. My other advice is to seriously consider doing Collaborative Law (Collaborative Divorce) because the solutions you can craft will be much better than a solution that a court can give you.

Learn More

Kyle is a highly regarded family attorney who draws on deep experience and a competitive nature in seeking to prevail for his clients. A seasoned litigator, mediator, and collaborative lawyer, he handles the gamut of family law matters, with particular expertise in complex custody and business cases. He has been listed in Texas Super Lawyers since 2008, named a Best Lawyers in America for family law (2011 -2022), and has been A-rated preeminent by Martindale-Hubbell, the highest rating for legal ability and ethical standards for 20 years.

For more information on how to protect your family business in divorce, please contact Kyle Basinger at 214-373-7676.