Recently, Business Insider published their The Most Expensive (and Explosive) Celebrity Divorces of All Time, which gave readers a look into the “high-dollar” world and the damage that can happen when a marriage doesn’t work out. For most of us, divorce is very real. In fact, according to the American Psychological Association, roughly 40 to 50 percent of marriages end up in divorce in the United States. But it’s the stories of multi-millionaire divorces and the impact their divorce has on their business that most people can’t seem to fathom. But is this reality a little closer to us than we might think?
Sure, most of us will never have to negotiate a $38 billion divorce settlement that involves the transfer of roughly 19 million shares of stocks of your business into your soon-to-be ex-spouse’s account. However, there are an estimated 32 million businesses in the United States (2019), so there is a very good chance that if you are married and you own a business, your marriage could end up in divorce and that divorce will have an impact on your business.
What Happens to Your Business in a Divorce?
In a nutshell, during a divorce involving a business, three factors must be determined:
- Is the business a marital asset or separate property? In Florida, there are laws that acknowledge that non-marital assets which appreciated during the marriage and/or asset acquired during a marriage can be considered marital property and can and will be divided between the spouses. Also included are debts and liabilities incurred during the marriage as well;
- What is the business interest value?;
- What should happen to the business interests after the marriage is dissolved?
Now while these three factors may seem relatively simple, the process is far more complex and complicated. There are various valuation methods that may be used to determine the fair market value of a business interest. Those methods include, but are not limited to an asset-based method, a market method, or an income method. If a business interest has significant value, it might be necessary for one or more independent qualified valuation professionals, such as an Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), or Certified Public Accountant (CPA) to determine the appropriate fair market value of the business interest. If there is any dispute regarding the value, each party may hire its own professional to conduct a valuation of the business.
Once it’s determined if the business is a marital asset or separate property, and the value of the business interest is established, then it is time to decide what should happen to the business interests after the divorce. In general, the parties have three options for addressing private business interests in divorce. They are:
- One spouse buys out the other spouse;
- They agree to sell the business; or
- The remaining co-owners of the business.
During the divorce negotiations, the business must continue to operate with as minimal disruption as possible for the employees, shareholders, members, and creditors who are also impacted by the divorce proceeding. A good divorce attorney experienced in business matters can help manage issues that may come up during the divorce proceedings such as possible violations of a loan security agreement brought about by the divorce proceeding and how to deal with the additional legal scrutiny of managing your business that occurs during divorce proceedings.
Are There Ways to Protect Your Business During a Divorce?
If you own a business, especially if you owned the business before your marriage, you should take every action possible to protect your business investment. Here are a few strategies that can help protect you from losing your business in a divorce.
- Sign a prenuptial agreement. If you owned the business before you were married, you will want to have a prenuptial agreement signed before the wedding, which excludes your business from consideration as a marital asset.
- Get a postnuptial agreement. A postnuptial is much like a prenuptial agreement, except the agreement is signed after the wedding. It’s a good option if you want to define your business as separate from your marital assets.
- Place the business in a trust. Putting your business in a trust with the proper trust provisions can keep your business from being considered a marital asset.
- Execute a buy-sell agreement. This agreement defines what happens to a business, and its interest should any owner’s status change, such as death or divorce, or if the business is sold.
- Keep good records. In a divorce, it is very important to show that the business finances and personal finances were kept separate. As such, good record keeping is a must for all businesses. (Note: this is a good practice whether you are going through a divorce or not)
- Keep your spouse from working for the business. Keeping your spouse from working for the business mitigates your spouse’s arguments that he or she has contributed to the business and therefore they are entitled to a greater portion of the business either as marital property or as a result of contributing to the value of the non-marital property.
Things to Think About When Going Through Your Divorce
- Taxes. Taxes are an important factor in property division. Sometimes it may not be beneficial for one of the parties to have a financial interest in the business after the divorce. There may be other property that is more beneficial to own rather than the interest in the business.
- Experts. Having the right qualified experts can save time and money in the overall resolution of your case.
- Attorney. Choosing the right attorney to help you through the process. A simple divorce is stressful and emotional enough for most people. Adding the complication of negotiating the fair market value of a business and dividing the business interest adds a whole other level of stress and complexity.
- Planning. Consider how the divorce will affect your business.
A good attorney will work closely with you and any experts to help you assess your business ownership rights and help you to craft a settlement that is tailored to the specific needs of your family and your business. These are complex financial matters that often raise complex legal issues in the court system. You need to have an attorney on your side who can effectively argue these complex legal issues before the court.