Very few people commit to a marriage with the idea of an impending divorce and often opt not to sign prenuptial agreements. When this happens the small business owner and his or her spouse will have to come to an agreement as to the fair market value of the business.
The ideal situation for protecting a business through divorce proceedings is a prenuptial agreement, especially if the business was established prior to marriage. For younger couples with a start-up or new business, they often don’t foresee a multi-million dollar operation in their future, even if they’re hoping for it. They’re dreamy-eyed and leave the business in a precarious situation when the marriage falters.
Without a prenuptial agreement or other protective agreements in place, two seemingly unthinkable events can occur:
- Your ex-spouse becomes your business partner.
- The business must be sold in order to split the assets.
Even if those two outcomes are avoided simply coming to an agreement on the value of a privately owned business can be a long and expensive exercise during a divorce.
Others Ways to Protect a Business in a Divorce
Let’s say you are that business owner who doesn’t have a prenuptial agreement. There are still ways to protect the company in the event of a divorce.
- Execute Buy-Sell Agreements. In a multi owner business there are many compelling reasons for having a Buy-Sell Agreement that go far beyond dealing with the complications of divorce. A Buy-Sell Agreement can include provisions that allow the Company to “block out” spouses or require that unmarried shareholders sign a prenup and prohibit the transfer of shares without approval of other partners.
- Think carefully before “hiring” your spouse. The more integrated your spouse is in the business the more he or she has “stake” in the company. The Company could grow to be just as dependent on your spouse as you!
- Know the value of your business. And, communicate with your spouse about its value. When a spouse knows nothing about the business they can assume the business’s value is far in excess of reality. In the event you were to die or become disabled unexpectedly your spouse would be well served to have some knowledge of the value of what is most likely your most valuable asset.
Determining the Business’s Worth
Obtaining an accurate business appraisal is crucial for business owners—divorce or no divorce. At some point an estate needs to be evaluated for a number of reasons, divorce being one but also for estate or exit strategy purposes.
Kehlenbrink, Lawerence & Pauckner CPA can assist in business appraisals, estate tax planning, Buy-Sell Agreements and Limited Partnerships. If you need to protect your business, we’re here to help.
Tell us in the comments about any businesses you’ve seen entangled in divorce proceedings.