Family businesses are vital contributors to the Texas economy. Texans pride themselves on the ability to make a living on their own, building successful organizations with the cooperation of family members and their hard work. Family businesses can take decades to build, only to crumble during contentious divorces, shattering a legacy of work and dedication.
Whether it is a business established by previous generations or created when a marriage was new and felt indestructible, losing a family business can induce sleepless nights and overwhelming stress. But there are solutions to keeping a business and the profits from a business intact to prepare for the next phase of life after divorce. Preplanning for unexpected events and changes is part of doing good business.
Divorce is most likely one of those unexpected events in life. When marriage partnerships are new, it is easier to work around differences with more give and take. But marital relationships, like business partnerships, can become battlegrounds with the unlikelihood of compromise. As we will discuss, planning ahead is always the best option, but when a marriage partnership is spiraling and divorce is imminent, preserving a family business requires action and the direction of knowledgeable Texas family law attorneys with a steadfast understanding of navigating divorce.
Divorce and Family Business Operations
Getting a divorce is difficult enough on its own, as many different aspects need to be taken into account, including assets, children, and finances, among others. Dealing with these important life issues, along with determining what to do about a family business, can seem nearly impossible. Ultimately, each party must determine their intentions for potential ongoing involvement in the business, as well as the best way to divide the business financially, allowing for the process to be as smooth as possible.
Review Existing Agreements
The soundest advice we can offer is to consider an agreement that designates the division of particular or all of the assets in a marriage, especially business assets. When considering a divorce that involves a family business, any existing prenuptial agreement should first be taken into account. In the event the business began before the marriage, a prenuptial agreement might specify what will happen to the company in the event of a divorce.
Postnuptial agreements work the same as prenuptial agreements. If a business is established after the marriage, then both partners must agree to the terms of the agreement, which can designate ownership, how revenue will be managed, the division of assets and debts, or determine that only one partner is the sole owner. This often works in favor of the partner without ownership to protect them from any outstanding debts a business may owe.
Those who choose to forego prenuptial or postnuptial agreements can opt to set up a buy-sell agreement to protect a family business from collapsing due to divorce. This agreement – also referred to as a buyout agreement – is a contract between business co-owners that governs the business in the event one co-owner dies, is forced out, or chooses to leave the business. With regard to divorce, a buy-sell agreement would require a former spouse to sell any interest received back to the company owners at a specified price.
Consider How the Property is Classified
Before considering the best way to preserve a family business, it is essential to understand Texas law regarding the classification of marital property. Texas is one of a small handful of states that sees assets gained during a marriage as community property, which will have a tremendous bearing on your business during a divorce. Separate property are those assets, including a family business, that may have belonged to a spouse before the marriage.
Separate Property and Community Property
If a family business is brought into a marriage, then it is likely separate property. A marriage partner may bring assets, such as a business, into a marriage or inherit or be gifted assets that are considered separate property or owned by one partner during the marriage, providing a degree of protection for those assets. Any assets that a couple accumulates from the date of the marriage until the date of the dissolving of the marriage or an agreed-upon date are considered community property.
Texas law requires community property to be divided in a just and right manner under the law. Understanding that this definition does not translate to an equal 50/50 division is critical. And even though a business is a separate property owned by a spouse before marriage, it still likely earned income that accumulated during a marriage. That income will be considered community property.
Establishing pre- and post-marital agreements to address every aspect of a business, including the income earned, can effectively define how a business will be handled should a divorce occur. When drafting such an agreement, a Texas divorce lawyer can advise you about the commingling of assets and how to protect separate property by establishing specific bank accounts for separate property funds and any resulting income. By law, a spouse alleging marital property is separate property must present clear and convincing evidence to prove that property is separate and not community property.
Choose a More Amicable Divorce Strategy
Consider an uncontested or collaborative divorce if you and your partner can still work together toward a mutual agreement. Both options will ultimately give you more control over the division of assets in a divorce. Working closely with a Texas divorce attorney to advocate for your best interests is always recommended to minimize property division complications and ensure a fair division.
Collaborative divorces will allow you and your spouse to access a team of professionals who work for the mutual benefit of both partners, which requires the ability to communicate effectively. Some options pertaining to the family business may fit both spouses’ needs and allow a business to stay intact, providing essential revenue. Personal representation is still recommended in a collaborative divorce in Texas.
Consider Keeping Family Business Relationships Intact
Arguably, the simplest way of structuring a family business after a divorce is for the spouses to continue their business relationship despite ending their marriage. While this option won’t work for every couple – especially those in more antagonistic situations – it can allow for a much easier transition.
When deciding whether to keep a family business relationship intact, it’s important to have a shareholder or buy-out agreement drawn up. As previously mentioned, this gives either spouse the right to buy the other out at a mutually agreeable price; however, the ultimate value of the business should first be professionally assessed. A well-crafted partnership agreement can outline the business relationship to address partner responsibilities and how to handle conflicts.
This scenario is not unheard of but requires both parties to get past their personal hurts and differences to work together to ensure the stability of a business through a mutual professional working relationship.
Consider a Buy Out
Divorcing a partner is difficult, no matter the circumstances. The challenges can intensify when a business is involved. If one partner is particularly interested in keeping the business, but the other partner wants out, the partner who chooses to keep the business may decide to buy out their partner’s interest in the business.
If the business is a marital asset considered community property, then it must be considered when the assets from the marriage are distributed. You may choose to continue to share the business, but many couples no longer want a business relationship after their marriage has ended. If you are considering buying out your spouse’s interest in a jointly-owned business as part of your divorce settlement, there are some things to think about.
A Business Valuation is in Order
In order to establish a precise buyout amount, it is essential that you know the value of the business at hand. To determine everyone’s interests in the business, arrange for a valuation of the company. A business valuation will define the monetary value of a business by comparing it with similar companies or determining its value through the analysis of its assets, debts, and existing contracts. When the value of a company is estimated, equal assets from community property may be exchanged.
Determine the Financial Interests of Both Partners
Some couples may share the duties and the investment of a business 50/50, but this is not always the case. Often, one partner invests more time while the other invests more money in the business. Each individual typically has their own role.
Sometimes, one spouse may have put in less time and money because they are busy running the household and managing the children, knowing the other partner has more time to sink into building the business. To fairly divide the company, each partner’s role and contributions should be clearly defined.
Cash Buy-Outs May Be the Answer
If you can afford to, a cash agreement to buy the business is the easiest way to proceed. By paying cash for your soon-to-be former spouse’s portion of the business, you own the controlling interest with very little headache. However, this will obviously depend on several factors that are listed below:
- How liquid your finances are
- The valuation of the business
- How much of a share is involved in the buy-out
Having qualified professionals perform a business valuation will ensure the price you pay is fair.
A Possible Trade Could Work
If other assets in the marriage may be valuable to your former partner, it is possible to approach them for a trade. This is particularly helpful when you do not have the cash or the financial resources to buy a portion of the business immediately. This may involve taking over a piece of vacation property, an art collection, or some other investments of equal value in exchange for their share of the company.
Depending on which works better for your business and your personal finances, you could broker a deal where you end up with the company, and your ex-spouse ends up with something they are satisfied with – or maybe even happier about – in exchange.
If there are insufficient assets to cover a buyout, then establishing payments to your partner until the debt is settled might be considered, but understanding the tax implications of property exchanges is essential when you own a business and are navigating a divorce.
Things to Consider
When you sell your portion or buy your former spouse’s portion of the family business, a simple exchange of money or equivalent valued assets is not where things end. You should work closely with a Texas divorce attorney to consider all other applicable factors before making an agreement.
Once a partner becomes the sole owner of a family business, protecting intellectual property is essential to maintaining a Texas family business’s integrity. There are certain identifying aspects of your business that set it apart from others. If the other partner makes the decision to open a business that may be a competing business, protecting your intellectual property is critical.
Federal law prevents unfair or deceptive trade practices, allowing protection for your business from other businesses posing as connected to or representative of your business.
Work with a Brazoria County divorce attorney to prevent the following:
- Sharing of trade secrets
- Brand identity misuse
- Copyright infringement
Non-compete clauses can address many difficulties with family businesses and divorce.
Use Trusts to Protect Generational Wealth
Another important item to consider when going through a divorce involving a family business is the use of trusts. Trusts can be used as a means to protect family business assets in the long term and shield them in the event the next generation goes through a divorce.
For instance, if a parent makes a gift to their child in family business stock, this can be put into a trust that benefits only the child. In the event the child later marries and goes through a divorce, their spouse will not have access to the funds within the trust as long as the gifted stock stays within the trust. This method is often favored in high-net-worth situations.
Consider Selling the Business
While this can be difficult for some to consider, the option of selling the family business following a divorce is a viable possibility to split the profits in a more straightforward resolution. In the event the family business happens to be the largest component of a couple’s assets, selling it could be the only viable option.
If the business sells quickly, both parties will then have the funds to pursue other business dealings. Additionally, selling the business allows individuals to sever financial ties with their former spouse, making for a clean break; however, in the event the business is not easy to sell, this could result in ex-spouses continuing to work together for several months or even longer to ensure the business continues to operate until it is sold will be necessary and is often difficult.
The Benefits of Compromise in a Texas Divorce
Getting past the anger and heated emotions surrounding your split allows marriage partners more control over the outcome of the division of assets in a divorce. Compromise does not mean giving in or giving up. It is critical to prepare for a future that is different than you previously envisioned.
Enlisting the help of a supportive divorce attorney in Brazoria County, Texas can allow someone to step in on your behalf to handle heated discussions and emotionally charged interactions. And enlisting the help of mediators can assist spouses in finding a compromise, particularly when challenging asset division is part of a marriage.
Brazoria County Divorce Attorneys
Drafting legally binding agreements is recommended to protect a family business. Maintaining separate property in such a way that it remains protected when a divorce occurs takes dedicated attention. Ultimately, when agreements are not in place and assets have been blended or commingled, it will be up to marital partners to find a way to agree on the division of assets or rely on the courts to determine a just and right property division.
Making the decision to move forward with a divorce is difficult enough on its own. When this decision is intertwined with a family business, it can make for an incredibly complex process that will require the insight of a Texas family law attorney. At Terry & Roberts, our Pearland high net worth divorce lawyers have decades of experience working with clients to establish divorce goals in order to reach the best possible outcome for those involved. If you are considering a divorce that involves a family-owned business, contact the lawyers at Terry & Roberts today to discuss your needs.