Business owners are often too caught up in promoting the growth of their businesses that they fail to take into considerations the consequences divorce may have on that business. The same is true for happily married couples, who never consider the possibility of divorce. But the reality is, if the terms of a divorce are not handled properly, the business could suffer. The potential for serious consequences to your business after divorce can be managed, or even eliminated, if you plan for them.
The importance of planning for divorce
Most business people understand the importance of putting all business transactions in writing. This is especially true if you know the risk of losing your business is more than 50 percent. So, knowing that nearly 50% of all marriages end in divorce these days, why wouldn’t you include provisions regarding divorce or separation in your business plan? Yet, married business owners seldom create a plan that addresses divorce or separation, leaving them unprepared for the substantial harm that divorce can have on a business.
The difficulties of dividing business property
Possibly the most problematic issue that arises when business partners divorce is trying to determine the value of the business and its assets. This valuation is required in order to determine the portion each spouse should receive in the divorce. Similar to the division of personal assets during a divorce, business assets must also be divided. In most states, property and income that are accumulated during marriage are to be divided evenly, if the couple divorces. That is usually true, even if one spouse did not officially contribute to, or work for, the business.
Plan ahead and put the terms in writing
There are different ways to create the necessary plan, including a prenuptial agreement, a shareholder agreement or a buy-sell agreement. Either way, you need a written agreement that provides instructions on how the business interests of the co-owners can be bought or sold. Without such an agreement, a legal dispute over the value of the business assets will be unavoidable. This type of legal battle could potentially last more than two years, and could also mean the end of your business.
When the business is the root of the marital issues
Regrettably, for some couples, the business may have become the source of the problem that caused the marriage to fall apart in the first place. In those cases, emotions will certainly complicate the issues and make it even more difficult for spouses to reach an agreement on valuing the business assets. Spouses, as co-owners, may build resentment over the time, effort, and money expended in growing the family business.
Trouble valuing the business
The sacrifices that were made by the co-owners play a more substantial role in valuing the business, but these sacrifices cannot realistically be quantified. When the business itself is a source of conflict, the co-owners become touchy and it is nearly impossible to reach an agreement. This is where having written terms in place for handling divorce can make the process less difficult, as it relates to the business.
If you have questions regarding the effects of divorce, or any other small business planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.