When you own a business and get a divorce, your business may be put in jeopardy. Startups often begin with a spouse watching the kids or providing for the family while the other spouse works hours on end building a business.
This time away from a spouse often leads to divorce.
Preserving a business in a high-asset divorce is possible – to an extent. A common issue, according to many divorce attorneys, is that couples often start their marriage with a small business or little income and savings.
The couple doesn’t expect the business to be worth millions ten years from now, so they don’t do their due diligence and protect the business before saying “I do.” Spouses gain a stake in the business for the sacrifices and work they put into the business.
If you own a business, you need to protect it.
1. Limit the Spouse’s Role in the Business
If you know divorce is imminent, limit your spouse’s role in the business. The courts will look at:
- The role of the spouse in the business
- The length of time the spouse helped grow the business
A spouse that works as the director of marketing for ten years for the business will be a vital cog in the business’s operation. If a spouse wasn’t a part of the business or was only part of the business for a month, there is less of a case to justify that the spouse helped build the business.
2. Sacrifice Assets to Maintain Control of the Business
Business owners can retain 100% ownership of their business by sacrificing other assets in the divorce settlement. The assets are added up, and the whole of the assets are divided equally.
A few assets you can forfeit are:
- Investment portfolios
If you choose to allow your business to be divided up as an asset, try and secure an agreement wherein you can buyout your ex’s share if he or she decides to sell the share in the future.
3. Current Revenue Valuation
If the business valuation method used to determine the value of the business is based on projected growth, this can lead to grossly overpaying in a settlement. A fair market value for the business based on current revenue valuation is preferred.
A neutral, appointed valuation expert is the best choice to properly value the business.
4. Arrange Payments to Maintain Control of the Business
The final way to divorce-proof your business is to agree to make payments to a partner over time. Payments made over time allow the business to grow while satisfying your divorce agreement.
A spouse may receive 10% of the business’s profits until the settlement is satisfied.
Of course, if your business already exists and you’re in the process of getting married, draft a prenuptial agreement. The prenup will allow the business to be non-marital property. Keep in mind that if your spouse helped grow the business, he/she may challenge the prenup due to the sacrifices made to grow the business.
Businesses can be placed in a trust, too, which makes the trust the owner of the business.
A buy-sell agreement is another method to discuss with your lawyer. This agreement allows you to define what happens to the business in a divorce.