What is the impact of divorce on your business?
With 1 in 2 marriages nowadays end in divorce, asset allocation becomes a stressful and difficult ordeal. Things get even more complicated if a business is involved.
Whether you are a majority shareholder, board member, or CEO, there are things you can do ahead of time to make sure that the dissolution of your marriage does not disrupt your income or your organization.
What are the impacts?
Divorces are complicated. Aside from child care, the financial implications are the most daunting. Even if the dissolution of marriage is unchallenged, there can always be a complaint about anything on your behalf.
There is a major reason for this: marital property. Defined as “all income and assets acquired by either spouse during marriage ”, it includes money in a savings account, stocks and bonds, and other assets.
Community ownership or equitable distribution
What is the real stake of your business? Currently, nine US states are community properties: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If you live in one of them, it’s a 50/50 split.
The other 41 states are considered to be areas of equitable distribution. In these places, the final decision regarding matrimonial property is determined by a court. Decisions like this could become a long process, especially if neither party agrees on what a fair division is.
Divorces drain the emotions of everyone involved. If you are running a business, your focus could change during this time, putting your business at risk. You may be distracted by talking to lawyers, by collecting and delivering documents, or by the toll the situation has imposed on you.
A considerable challenge arises if you are a significant stakeholder. If your ex receives a substantial portion of your shares during the settlement, he could become an uninvited partner, throwing the business into chaos. As a result, your interest has been diluted, which may lead to a change in your status.
Suppose your spouse is currently or has been involved in the business, especially as a senior manager. In this case, the situation becomes even more complicated, as they still have a say in the day-to-day operations. They may also have received part of your stock, thereby increasing their position.
There are two scenarios here. First, they leave the company, selling their stake, which immediately relieves the tension and can affect the share price. Second, they stay, which could cause tensions in the office that may never dissipate.
What can you do?
What’s the best way to prevent this from becoming a reality? Protect your business up front, before you get married, and make smart decisions along the way. In addition, other actions that you can take are as follows:
Write a prenuptial or postnuptial contract.
Before marriage, no partner wants to admit that the marriage could fail. However, if there are significant assets at stake, including an existing business, it is vital to face the facts.
Going into a prenuptial before or after the wedding soon after the wedding will clearly define what will happen to the business if things go wrong. The first question to consider is whether the existing company should be considered part of the joint marital property, even if one of the partners was actively involved in the management of the business during the marriage.
Other things to include are the agreed value of the business at the time of the divorce and whether an asset appraisal is transmitted.
Separate your finances.
Do not use collateral in your home to invest in your business. By keeping these assets separate, there will be less confusion down the road as to what belongs to whom.
Pay yourself a living wage.
Many business owners pay themselves reduced wages to make sure they stay in a liquid state. The downside here, however, is that there are more leftovers to hand out in the event of a divorce. Paying yourself a higher salary leaves less availability if it turns out that you have to pay a hefty settlement later.
Put the business in a trust.
When the business is placed in trust, you do not own the business. This way, there is nothing on your behalf that is included in the settlement. However, there are laws on fraudulent transfer of assets. If you know that you and your spouse are likely to divorce and transfer the business to a trust, your state may consider this transfer null and void.
Take out an insurance policy.
If the divorce settlement costs more money than what you have available, you don’t want to be in a position where you have to sell all or part of your business to cover it. Have a whole life insurance policy you can wind up could prevent this situation from happening.
What if it’s too late?
If you thought things would go on forever and didn’t take steps to protect yourself when you got married, it’s not too late. There are things you can do.
Sell the business.
As drastic as it sounds, it can be the ultimate solution. If, due to the distribution of shares, your ex-spouse is now involved in the business and that working relationship is untenable, the only option is to bail out. Keep in mind that the sums from the sale of your business will be evenly distributed according to the court ruling.
Sacrifice other goods.
You may be able to keep 100% of your business if you give your ex-spouse more or all of one or more of your other assets. Perhaps the family home is more important to them than it is to you and could be used as a settlement tool to secure your ownership of your business.
Sell a stake in the business.
To finalize the divorce settlement, you may need to get your hands on instant cash. Rather than selling the entire business, consider offering a portion of your stock to existing partners or employees. You can even negotiate a buyout agreement for a later date.
Make payments over time.
You and your ex can come to an agreement, where the settlement is paid over a period of time, possibly as wage garnishment. Making this arrangement respects your commitments and your business interests are protected at the same time.
Divorce is real.
Unfortunately, not everyone gets the fairytale ending. When a divorce occurs, entities such as businesses are drawn into the settlement agreement.
To protect yourself and your business from falling victim to your marriage breakdown, you need to prepare in advance. Organize a pre or postnup. Separate your personal and business finances and pay yourself a living wage. Consider putting the business in trust and purchasing a whole life insurance policy.
However, if it’s too late and you haven’t taken precautions, there are things you can do. You can sell all or part of the business, enter into a binding agreement to offer other assets in place of the business, or make settlement payments over time.