What Happens to the Family Business After Divorce?

Maryland divorce attorneys are routinely asked by their clients to explain what will happen to the family business.  After all, the State of Maryland recognizes most family businesses as marital property, meaning that the value of the business accumulated during the course of the marriage.  The common misconception in divorce proceedings is that a business owned and operated by only one of the spouses is immune from asset division during the split.  Don’t be fooled.  When it comes to businesses, what you consider “yours” is almost always considered “both of yours.”

Consider the classic case of the entrepreneurial husband who owns and operates a contracting company.  He manages several employees, owns several vehicles, and maintains a vast array of construction tools and materials.  His wife is a stay-at-home mother whose primary duties in the relationship include cooking, cleaning, and raising the children.  The husband works 8-10 hours a day for his company and the wife has never operated a saw or driven a nail.

In Maryland, like in most jurisdictions, courts have distinguished the purely economic contributions of the husband and the purely domestic contributions of the wife.  However, these relatively opposite contributions are likely to be counted somewhat equally in the divorce process.  Here’s how it works.  The wife’s counsel will argue, backed by well-established case law, that the wife should be entitled to her fair share of the assets or value of the husband’s business.  In theory, the wife’s domestic contributions are what allowed the husband to become an entrepreneur and grow the contracting business to what it is at present.  Taking the logic a step further, if the wife had not been home raising the children and caring for the household duties, the husband may not have been able to build the company to its present value.

What this means for the divorcing parties is that they should consult a Maryland divorce lawyer, who can arrange for a business appraisal to be conducted.  The business appraiser will attempt to approximate the value of the business as measured by the value of all the assets owned by the company (in our example, the vehicles and tools) along with what is called the “goodwill” of the business.

Goodwill is a term for the concept that a business derives its value from things other than its tangible assets.  Some factors that determine the goodwill of a business include the reputation of the business’s name, the reputation of the owner or employees who work for the business, the business’s ability to generate repeat customers, and the location of the business in relation to where its patrons come from.  Like tangible assets, goodwill has a value.  The value is subjective and is likely to be hotly debated in divorce litigation, especially if one party believes the other is drastically undervaluing the business.

An experienced Maryland family law firm is likely to have handled dozens or hundreds of cases with similar complexities.  The family business is likely to be one of the most valuable marital assets to be divided in the divorce.  Make sure you get your fair share.

See related blog posts

Should I Get a Prenuptial Agreement?

Dividing Marital Property

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