Divorce is never an easy situation, but it can definitely become even more complicated when there is a family business involved. Family businesses are the result of lifelong work, and the thought of losing that time and investment can weigh heavily on your mind. Even if the company was started and run by one spouse, it does not mean that the other spouse is not entitled to some portion of its value. Because a family business can be such a valuable asset in a marriage, oftentimes one spouse may try to circumvent compensating the other spouse by selling the business before the divorce is settled. Even if this does occur, it is likely that proceeds from the sale will be awarded to the other spouse.
A question of ownership rights
Whether or not a spouse is able to sell a family business before a divorce is finalized will largely have to do with the spouse's ownership rights in the business. If the other spouse has no ownership rights under the business agreement, then the spouse is free to sell the business to who and for what value they want. If a spouse is the business owner, a divorce will not affect their decision making power in regards to the business, which the sale of a business falls under.
So the answer to the question is yes, a spouse can sell a business before a divorce, if they are the only one with ownership rights, but that does not mean they will be allowed to keep all of the proceeds to themselves. During the divorce, the business will be listed as marital property, and the proceeds from the sale will count as such. In this case, the other spouse will be compensated for their share of the company.
In the event that both spouses have some ownership rights in a family business, then the sale cannot proceed without the other's consent, and the proceeds will be allocated based on the business agreement and ownership percentage.
What are the rules for business property distribution?
If you have a family-owned business and are wondering what portion of the business will go to each spouse, you will have to refer to the property distribution laws of the state. Most states follow the rules of equitable distribution, which means that all property will be divided fairly. It is crucial to remember that equitably does not mean equally. The rule of equitable distribution takes into consideration factors such as each spouse's income and the length of the marriage when determining how much of the company each spouse will get. There are several states that follow community property rule which will split everything down the middle.
How is the value of a business determined?
Once you have determined how the business will be split, it is critical to determine how much the business is worth. To ensure that the business is valued fairly, the court will bring in a professional business appraiser. These appraisers are experienced in being able to determine the appropriate value of a business by taking into consideration the assets, the income, and the market.
If you are concerned about your spouse damaging the business value
There are some cases, especially in acrimonious divorces, where you may fear that your spouse will sell the business for less than the value, in effect damaging the share of the company you are entitled to. When this occurs, you can petition the court for a restraining order, which can restrict the owning from selling or transferring the business until the divorce is finalized. You will need to prove to the court that it could negatively affect the outcome of your case.
Always protect yourself in the event of a divorce by hiring a trusted attorney experienced in divorces where family businesses are involved. They can help you protect your assets and put you in the best position to negotiate your settlement.