In the days and weeks leading up a person’s wedding—or in the blissful newlywed days to follow—the idea of divorce sounds impossible. But the fact remains that plenty of marriages don’t end in happily-ever-after, and if you own a business, the results could be worse than a broken heart. You could wind up with your ex as your business partner or worse, selling the business to raise cash or pay a settlement.
So how do you protect yourself and your business? The best time to prepare is before you say “I do,” but even afterward, there are still steps you can take to help mitigate the damage of a divorce.
1. Prenups are best. Not surprisingly, the most effective way to keep your business from becoming a point of contention in a divorce is a prenuptial agreement, drawn up by an experienced attorney licensed in your state. While your business might not be a large asset at the time of your wedding, it will likely—and perhaps substantially—grow. As it does, so could your spouse’s stake in it. When done correctly, a prenup clearly defines what each party’s assets will be in the event of divorce. “The prenup spells out what’s a marital asset and what’s separate property for each spouse, such as property acquired before marriage, or inherited property that is kept separate,” says Birmingham, AL-based attorney Patrick Yeatts. “The prenup can designate a business as separate property for that business-owner spouse. In that case, the wife or husband who is not the business owner does not acquire interest in that business during the course of the marriage.”
2. Get a postnup—but early. Didn’t get a prenup? If you get a timely postnuptial agreement (like a prenup, it establishes who owns what and how property will be divided) well before the marriage starts to break down, it might provide similar protection. Be warned, though: Judges are somewhat leery of postnups (especially those signed near the time of the breakup) and might consider them an attempted end-run around the law. “Postnups are not given the same consideration as a prenup, and some states do not even recognize them,” says Yeatts.
3. Appraise your business. If your betrothed or spouse shuts down the idea of a prenuptial or postnuptial agreement, there are still ways to protect yourself. Get an appraisal of your business prior to the marriage (or as soon as possible thereafter) to document its value. This will make obvious the appreciation of in the value of the business during the marriage and keep your ex from benefitting from your premarital gains. Again, the ideal time to do so is before you say “I do.” Jacqueline Newman, a divorce lawyer based in New York, says appraisals at the time of divorce can reveal a higher value than the business owner expected and thus advises against them. “In my experience, many of my business owner clients want to avoid appraisals of businesses when getting divorced,” she says.
4. Draft a business operating agreement. A business operating agreement dictates how one business partner’s stake would be valued for purchase by the other partner or partners. “This formula could be helpful in determining the value of the spouse’s business interest,” explains Newman. Yeatts says BOAs can also “prohibit the transfer of interest outside the agreement of the business partners. They demonstrate the intent of the parties. While they are not always enforceable in a divorce setting, they can be seen as a guiding principle.” Partnership agreements can also spell out what will happen to a business should any partner’s status change, including marital status. Such documents could limit a spouse's ability to acquire ownership or provide any partner with the right to buy—at a preset price—any interest in the company awarded to the ex-spouse.
5. Use a trust. Placing your business in a trust prevents it from being counted as a marital asset because you no longer own it—the trust does. “The court doesn’t have jurisdiction to divide up that business because it’s not considered marital property,” says Yeatts. If this is your strategy, do it quickly because, like a postnup, “a court can look at the trust and wonder if it was established in anticipation of divorce,” Yeatts explains.
Buying out your ex
What happens if the aforementioned efforts fail and your former spouse is awarded part of the business? “You have to decide if you can work together,” says Yeatts. “If not, can one party afford to take over, or are you going to dissolve the business and split up its assets?” When it’s time to settle, you can use some strategies to help retain ownership of your business:
1. Offer up other assets. Sacrificing other marital assets, such as a house, cars or retirement accounts, could motivate your spouse to give up his or her stake in the business. If it matters to you, be willing to trade.
2. Ask for a payment schedule. It's common for one spouse to buy out an ex’s share of the business over time. Monthly payments can come from the business's cash flow or even a business loan.
3. Sell a stake to a third party. Why not sell a minority stake in your business to an investor, or to employees through an employee stock ownership plan? This could provide the cash you need to buy out your former spouse.
Some wise steps, taken in the early years of your marriage, could protect you down the road. First, keep your family and business finances separate. Mingling family and business finances might entitle your ex to a larger piece of the business.
Second, pay yourself well. Sacrificing salary to build up your business coffers isn’t a good idea: Your ex could end up with more of the company’s assets in the event of divorce.
Third, get in the habit of examining your business and personal finances on a regular basis, even if your spouse is the one who “handles the books.” Lawyers will tell you that all too often, an unhappy spouse will begin hiding away assets months or even years before filing for divorce. Assets that are not discovered at the time of the divorce are difficult to recover after the papers have all been signed.
Finally, get insurance. Whole-life insurance with a cash value that builds over time can be liquidated to buy out an ex’s share of your business in the event of divorce.
Contact Gina LaVecchia Ragone: [email protected]