Divorce is difficult and stressful for everyone, but especially when it involves a business that you have put your heart and soul into. Whether you are a new business owner or an established and wealthy entrepreneur, it is essential to take steps to protect your business from the consequences of a divorce.
Section 1: Understand the value of your business
To protect your business during divorce, you must understand its value. Prior to getting any kind of formal appraiser from a professional business valuator, you should assess your company’s assets and liabilities, determine its cash flow and profitability, and identify any potential risks or challenges (i.e. lawsuits, significant changes in market conditions, loss of major customers, etc.). This should at least give you a baseline so you can have some preliminary discussions with your attorney and/or negotiations with your spouse. After you’ve done your initial assessment, you may decide that you still need to hire a business valuator, forensic accountant, or other professional to get a more accurate estimate of your business’s worth.
It will also be important to gather financial records for the company, such as tax returns, financial statements, documentation of business expenses, etc. Keeping your financial records up-to-date and organized can save you time and money in the long run.
Section 2: Consider a prenuptial or postnuptial agreement
Another way to protect your business during divorce is to consider a prenuptial (often called a “prenup” or a “premarital agreement”) or postnuptial agreement. A prenup is signed before marriage, and a postnup is signed after marriage. Experienced family law attorneys can craft these documents to fit your unique situation and can help clarify (1) which spouse should be awarded various assets in the event of divorce; (2) which spouse should be responsible for various debts and obligations.
Specifically, these kinds of agreements can detail how the business will be valued and divided in case of divorce. For example, you can agree to something like: “In the event of divorce, the value of Business X shall be determined by multiplying the average of the last three years’ gross profits by 3” (if the average gross profits = $100k, then with this formula, the value of the business would be $300k). You can also include provisions for buyouts, transfer of ownership, etc., to protect your business from being liquidated or sold. These agreements can provide clarity and peace of mind, particularly for business owners who have invested a significant amount of time and resources into their company.
Section 3: Take steps to separate personal and business assets
It is of utmost importance to keep your personal and business assets separate, particularly if you are a small business owner. First, open separate bank accounts, checking accounts, credit cards, etc., for your personal use and your business use. Second, keep financial records separate. Third, avoid using business funds for personal expenses and vice versa; blurring the lines between business and personal funds can complicate the division of assets during divorce (as well as cause you problems if your business is ever sued). Fourth, if you have partners, create buy-sell agreements to establish a clear process for transferring ownership in case of divorce or other life events.
Financial stability and independence are what many business owners have sought and worked hard to accomplish—maintaining that stability and independence takes strategic planning and shouldn’t be delayed. Sometimes this can be accomplished with an agreement between spouses, but where it can’t, business owners need to take various precautions to ensure their company is protected in the event of divorce.