For small business owners, a divorce can affect the entire course of the company. Growth might be stalled, day-to-day matters can often be put on hold, and the entire operation could be compromised. What’s more, divorce can not only affect the pair separating, but also any business partners and employees involved.
If you or your spouse owns a small business, talking about a split brings several questions to the forefront: How will my business be valued? Will I be forced to sell? How much money am I entitled to?
While the process may seem overwhelming, knowing what to expect and how to overcome certain obstacles can lessen the burden of ending a marriage when a family business is involved. And if you’re still single or engaged, there are steps you can take to help protect your business before the D-word is even discussed.
Divorce-proofing your business?
First things first: your small business is an asset, just like your house or your car – and a divorce court will have to deal with that asset just like your house or your car. Although it may be hard to completely shield a business from the impact of a divorce, taking the appropriate steps can limit a non-titled spouse’s claim for a slice of the pie.
One of the best methods of protecting a small business is a prenuptial agreement that limits how a divorce court can deal with that business. Prenups are like insurance for your marriage. You hope you never need it, but when you do, you’ll be glad you have it. When you’re bringing your livelihood into a marriage, having that safety net is even more important. Making tough decisions early on can protect your significant other from incurring your debt, prevent your family business from being torn apart, and take a weight off of any business partners.
A prenuptial agreement can save you a lot of headaches when a small business is involved by predetermining the distribution of assets or income in a divorce. If you have actively worked in and developed your premarital small business during the marriage, the court could still determine that its value is partly or entirely marital property and award your spouse a share of the same. In such a case, a prenuptial agreement could help to keep the business and its assets intact.
If there are multiple business owners, the business partnership agreement or shareholder agreement can designate the process of a buyout or valuation of interest if one of the business owners suffers a divorce. Although this agreement may not be binding in family court, the court would likely respect the effort to minimize disruption to the business and existing partners.
Three tips to surviving a small business divorce.
What if your small business was started after your marriage, or you don’t have a prenup that would control its distribution? If your marriage has already hit the rocks and you’re looking to minimize the effects on your business, there are steps you can take to salvage what’s yours.
1. Engage an independent financial expert. As with other assets in divorce, your business will likely be valued. This means that a financial expert will review the company’s books and records to help arrive at the value of the enterprise. He or she will ask questions about business practices and expenses, financial documents must be produced, and together you’ll determine what your business is really worth to the marriage. Having that information will help you make more informed decisions about the end your marriage.
Because two experts are frequently utilized, one for each party, the process of business valuation can result in significant costs. Sometimes, in order to save on some of this expense, the parties can agree to hire one joint financial expert to value the business. The valuation will also move faster if the books and records of the business are organized and easily available.
2. Work towards a negotiated settlement. While some cases just have to be resolved by a judge, most divorces end with some kind of agreement between the parties. Judges are human, and their decisions often lead to the simplest division of parties’ assets or income– which can often be problematic for small businesses worried about cash flow. A negotiated settlement is often the better way to preserve those businesses, because the parties can spend time working out the finer points of the deal, such as payments made to a spouse over time that help avoid a sale of the business.
Refusing to budge over trivialities, or to even speak to one another, will only end up costing both of you more money and time. So although a divorce can take anywhere from several months to more than a year to complete, the faster you and your spouse are able to work towards an agreement, the sooner you can move on.
3. Be transparent. Open communication is absolutely critical during the discovery process, not only in order to keep the proceedings moving, but to also avoid huge costs and even fines. Don’t make any significant changes to your business, such as modifying the business model, to decrease revenue. Don’t arbitrarily change the amount or the manner in which you pay yourself. If you’ve been taking a substantial salary during the marriage but mysteriously can’t afford that salary after divorce proceedings have begun, you might find your credibility lessened with the court. Questionable changes come up in court and put you at risk of orders that can cost you your business.
Divorce is never a conversation couples expect to find themselves having. But taking steps early on can not only help minimize the negative effects of a split, but also allow you to begin your new life with your small business intact.