How to Divorce-Proof Your Business
Would you believe that 6 out of every 10 business owners have no plan in place in case their business should get tied up in a divorce? Since the results of a divorce on a business can have a major financial impact, it’s foolhardy to ignore the potential problem unless you’ve always been and always will be single. During hard times, such as the recession we’re now experiencing, divorce rates tend to climb. However, few businesspeople have taken the time to consider what a divorce might do to their bottom line, and an even smaller number have actually taken steps to divorce-proof their businesses. So what would you do if you couldn’t stop your divorce in order to protect your business interests?
A business that you and your spouse own jointly can cause the most headaches if divorce should happen. Your entire work staff will divide itself in loyalties, and that alone can have a drastic effect on business operations. Many joint owners like this find themselves having to give up the business altogether in order to pay each party what is deemed to be their fair share. Even in cases when a business is owned outright by one party or the other, it may have to be sold in order to satisfy the needs of the divorce settlement.
At the same time, clients can get nervous about how well your company is being run. After all, everyone is aware of how emotionally-damaging a break-up can be, and they may wonder who is running the business while the owner’s mind is distracted by personal issues. This doubt could end up costing you customers and seriously decrease your bottom line. It’s always a good idea to have designated who will be running the show if, for some reason, you are out of commission.
The most effective way to safeguard your business is by having a prenuptial agreement. Although it may seem unnecessary while you’re in the throes of passionate love, later on, you may be glad that you took this step. Basically what it amounts to is making a cool-headed decision about what will be fair to both parties in the event that things don’t work out as you’d planned. In the case your business was started and built during your marriage, there are still options available to you, such as a buy-sell agreement, a trust, or a postnuptial agreement. You’ll need to consult with a finance professional in order to get a better handle on any of these options.
A privately held business can represent a major portion of the marital assets in divorce and become subject to division in the settlement. Without advance arrangements, you could find your business lost in a liquidation sale or divided into fragments or you could find yourself in partnership for a very long time with the person you are trying to get away from.
Some ways to divorce-proof-your-business include:
- A prenuptial agreement, drafted by a family attorney, which clearly identifies the business as your separate (as opposed to marital) property, in the event of divorce. Understand how to preserve this status throughout the marriage. Already married? A postnuptial agreement may do the same.
- Use partnership or shareholder buy/sell agreements to lock-out claims on the business by a spouse in the event of divorce.
- Clearly position the business as your employer, pay yourself a market salary and keep all business finances separate from personal finances.
If it seems too late for preventive measures, ways to deal with a business in divorce include:
- Obtain an independent professional business valuation. Buy your spouse out of his/her marital share of the business using other assets available to you.
- Structure a payment plan, using future business earnings, to buy your spouse out of his/her marital share. The true motivation for dynamic business growth plans.
- Raise funds for buying out your spouse’s share of the business by taking on an investor and/or borrowing against collateral or a cash value life insurance policy.
Divorce-proofing your business needs to be part of your long-range business plan. With the national average divorce rate at 52 percent for first marriages and 70-plus percent for subsequent marriages, and Tennessee far above average in the top ten states, you need to acknowledge the odds against you. Just as you protect your own business from many major casualties with carefully worded-contracts, as well as property, liability and life insurances, you must similarly defend against the much greater risk of divorce.