Divorce under any conditions can be a messy affair. Roll a business into the equation, and divorce can become emotionally and financially devastating, not just for the divorcing couple and their family, but also for the business’s employees and co-owners.
Part of the problem is that business can be high-stress and demanding. I don’t know if SBOs (small business owners) have a higher divorce rate than others. I could find no reliable statistics. However, one school of thought says that dealing with the everyday trauma of business adds one more layer of frustration to America’s most besieged institution.
On the other hand, especially when couples work together in a family business, divorce seems less likely, if only because husband and wife both feed at the same business trough. Also, they share a common vision. (One couple I know, who own four businesses together, say they would divorce, but they never see each other anyhow and are too tired to think about it seriously.)
One thing is certain (and, yes, I confess, with two divorces behind me, I’m a reluctant expert on the subject), divorce for an SBO can leave a once bucolic landscape a scorched wasteland. The good news? There are ways to divorce-proof many businesses.
The biggest problem when an SBO divorces is that the business is often the most valuable asset in the marriage. This can make it the biggest bone of contention in the divorce settlement snarling match.
So, it should come as no surprise that divorce can destroy a business. Even if it survives, the financial fallout can be devastating, says Laura Johnson, family law consultant and author of Divorce Strategy: Tactics for a Civil Financial Divorce (Broken Heart Publishing, 1998).
“In the majority of divorces,” she said in an interview, “the business suffered because of additional costs for legal and accounting services, inattention from stressed-out, depressed, or preoccupied owners, loss of employees, loss of customers, or the failure of the owner to take advantage of business opportunities.”
In one case, she explained, the squabbling went on for two years. “The husband’s legal and accounting fees exceeded $100,000. The wife’s were about the same.”
At least some of the grief and expense can be avoided by taking preventive steps, which can include the following:
- If you own a business and are about to get married, draft a pre-nuptial agreement before you tie the knot. Specify that the business is your individual property.
- If you are already a couple, draft a post-nuptial, buy-sell agreement. It should provide a formula for valuing the business in the event of a divorce and spell out who gets what.
- To assure that a multi-generation business stays within the family if a member divorces, consider a Family Limited Partnership. These versatile estate transfer tools can specify that business interests are not subject to division in divorce.
- Make sure everyone’s financial needs are addressed. Since most conflicts ultimately center on money, take steps to cool tempers. This can be done with trusts, as well as with life insurance. For instance, much of the sting of a pre-nuptial agreement that keeps a $1 million business in your name can be reduced with a $1 million life insurance policy on your life in your spouse’s name.
If divorce is imminent, remember that the business is the goose that lays the golden eggs, and no one benefits if it is killed. Johnson recommends that the couple “needs to control the process and maintain avenues of communication.” Otherwise, lawyers’ fees can consume assets, and there may be nothing left of the business by the time the dust of divorce settles.
To reduce the destructive impact of divorce, keep clean records, insists Johnson: “Produce records voluntarily, and don’t play games with retained earnings. Compromise on how the business should be valued and on reasonable income for support. That way, both of you come out in better shape.”
Divorce is an unpleasant — but all-to-common — reality in our society. It can be painful and costly. Nonetheless, being prepared can help reduce the financial damage to your business and to your family if you someday find yourself facing a divorce.
So, work hard. Make money. Have fun … and try to avoid a divorce.
– John R. Ingrisano, The Freestyle Entrepreneur.
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