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4 ways to safeguard a family business during a divorce

On Behalf of | Oct 16, 2023 | Divorce

Protecting a family business during a divorce is an important concern.

The dissolution of a marriage can have significant ramifications for the stability and continuity of the business, making safeguarding the business’s interests a priority.

1. Maintain open lines of communication

The cornerstone of any successful family business is effective communication. During a divorce, maintaining open and honest dialogues among family members involved in the business is important. Ensure that everyone understands their roles, responsibilities and the potential impact of the divorce on the business.

2. Separate personal and business finances

Financial entanglement can be a major hurdle during a divorce. To protect the family business, clearly delineate personal and business finances. Create distinct bank accounts, financial records and budgets for the business. This separation can help prove that the business assets are distinct from personal assets, potentially shielding it from division during divorce proceedings.

3. Implement a buy-sell agreement

A well-structured buy-sell agreement can be a lifesaver in times of family turmoil. Such agreements outline what happens to a family member’s ownership stake in the business if they decide to leave or get forced to leave due to a divorce. Having a predefined mechanism for valuing and transferring shares can prevent disputes and ensure the business continues to operate smoothly.

4. Diversify ownership structures

Consider restructuring the business to reduce the concentration of ownership among family members. By introducing outside investors or non-family members as minority stakeholders, you can dilute the impact of a divorce on the business. This approach may also bring fresh perspectives and expertise to the company.

While approximately 690,000 divorces happened in 2021 in the U.S., the complexity of the separation significantly grows when involving a business. Although challenging, the goal is to preserve the legacy of the family business for future generations.