What Happens To The Mom-And-Pop Shop When Mom And Pop Divorce?

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Owning a family business can be a dream come true when things are well in your marriage. You get to work with your spouse every day and build something to great together. 

But that dream can become a nightmare when co-owner spouses divorce. 

The Business Will Likely Be Your Biggest Asset 

The business is not only likely to be the biggest marital asset, but it is also likely to be the primary source of income for you both. This is a huge deal! 

You have to decide if you want to leave the division of this asset up to a judge or if you and your spouse want to be proactive and make a plan by preparing a prenup. 

How Business Assets Are Divided In Divorce In New York

If the business is started during the marriage, it is likely to be a marital asset. How it is divided will depend on many factors, including each spouse’s contribution to the business. Contributions do not have to be direct; it can include things like caring for the children while the other spouse worked or hosting parties for clients, among other things that indirectly contribute to the success of the business. 

Once each party’s  share of the business is determined, these are the typical options for dividing the asset: 

One party buys out the other 

The two most common issues with this solution are when 1) Both parties want to keep the business 2) The parties don’t have other liquid assets they can use for the buyout. 

It works best when one just wants out and is willing to take the money and the party keeping the business has the means to pay. Often they will use the liquidation of other marital assets (such as using their share from the sale of the marital residence)  or even “trade” other assets for the value of the buyout. 

For example, in a recent case, my client waived her interest in her spouse’s retirement assets in place of retaining the spouse’s share of the business. The client’s portion of the business was very close in value to the retirement assets, and after consultation with their accountant, we determined it was the best way to divide this asset since my client did not have the funds for the buyout. 

The business is sold and proceeds divided 

When the parties simply don’t have other assets, they sometimes choose to sell the business and divide the proceeds. 

This can be heartbreaking if you are attached to the business or have to lay off other employees etc. People often have to choose this option in particularly contentious divorces as they rack up so much debt in legal expenses that liquidating the business is the only option. 

In some cases, the parties realize that they can’t continue the business together but the business is also not able to proceed without both of them so it’s better to sell and start over individually. 

The Parties Continue To Run The Business Together 

It is very rare to see this option work long term for several reasons. The biggest is that most people cannot separate business problems from personal problems and their personal relationship ultimately interferes. 

If the divorce is contested, I highly discourage this option. While it may work in the short term, the business relationship is likely to deteriorate rapidly and you will be back in court before you know it. 

If the divorce is amicable and you get along with your ex very well, it may be possible, especially if you can both do your share with limited interaction. 

Closing A Business During Divorce 

This last option occurs often, especially when the business is operating at a loss and has little or no value. In this case, any assets held by the business are sold and proceeds used to pay off debts and any remainders divided. 

A failing business can certainly be a contributing factor to a failed marriage and, unfortunately, you sometimes have to pull the plug on both. 

Running a business with your spouse can be a rewarding experience, but make sure you know all possible outcomes before getting into. The best thing you can do to protect yourself and the business is to enter a pre or postnuptial agreement so that you and your partner are in charge of making the decisions regarding your business instead of a judge. 

Need help protecting your business from divorce? Schedule your case strategy session today.