Going through a divorce can be financially as well as emotionally devastating. That’s especially true for business owners.
Example: Jack Barnes has built his business into a thriving enterprise. However, the time he spent on the business has taken its toll. Now Jack is going through a divorce, and his wife Sharon, stands to receive part of the company in a property settlement. Jack does not relish losing absolute control of the business, and he does not want to have to deal with his ex-wife as a co-owner. In this situation, what can Jack do to avoid such a result?
One approach is to begin by determining a likely outcome of any divorce agreement. Discuss the possibilities with an attorney – one who specializes in family law, not necessarily your cousin with a general practice – about your state’s treatment of marital property. What portion of the company’s value is likely to go to your spouse, considering its worth when you went into the marriage and its growth since then?
At the same time, you should get a realistic valuation of your business from a reputable appraiser. Depending on what’s practical, you may use someone acceptable to both spouses or just hire one on your own. Either way, this should help you gain an understanding of your potential obligation upon finalizing a property settlement.
Let’s assume your attorney indicates that your spouse could be awarded half the value of the company, and its appraised value comes in at $3 million. You will know that your spouse could receive approximately $1.5 million, based on the value of your business.
With such knowledge, you can decide how best to proceed. Should you put your company up for sale and divide the proceeds, pursuant to the divorce decree, and then start a new business of your own? Sell some shares to a more desirable partner to raise cash to buy-out your spouse? Simply hand-over the shares and live with your ex as a co-owner? Or, do you really want to maintain your current ownership structure in the existing firm?
Assuming you want to keep your business and not have to work with your former spouse, you’ll have to make some arrangement to provide your portion of other assets instead of company shares. That could mean giving up real estate, securities, bank accounts, retirement accounts, vehicles, and so on. Keep in mind that tax-deferred retirement accounts may have a low value to you in the future, if you expect to be in a high tax bracket when taking withdrawals.
If you lack enough assets for a full trade-off, you may have to borrow against your company’s value to fulfill your part of the agreement. Another possibility is to enter into a property settlement note, sometimes known as a structured settlement. In effect, this is a buyout over time, using anticipated cash flow from the business to make up for the assets (shares in your business) you’ll be retaining. As is the case with any note, this arrangement should have a market rate of interest and a definite term, which may cover a number of years.
Ending a marriage is seldom pleasant, but the financial damage can be minimized if you gather the facts and make thoughtful decisions. Aim for an agreement that’s fair to both parties; proceed as quickly as possible, so you can minimize legal fees and get back to work without divorce on your mind.
Often, the best way that a business owner can reduce the financial damage from a divorce is to plan ahead. If you own a company and plan on getting married, consider a prenuptial agreement that designates your business as an asset that you will retain in the event of a divorce. Prenuptial agreements are not the most romantic of notions, but you might be able to deflect blame by telling your significant other that such an arrangement is your CPA’s idea.