Your marriage is coming to an end, and on top of the emotional event, your business could be in jeopardy too. You’ve spent years of your life painstakingly building your business into a thriving enterprise, but now your spouse could seek an ownership stake as part of your divorce settlement. Are you going to have to be business partners with your ex?
Shoulda, Coulda, Woulda
No one walks down the aisle expecting that the love filling their heart will eventually turn cold. It’s not surprising that very few of us prepare for the possibility of divorce. You may not have even started your business when you got married, or maybe it was just you working and dreaming big in your home office. Over the years, however, your little startup took off, and today your business generates a significant amount of income.
Unfortunately, your business is so successful that your spouse wants a piece. When you research how to protect your business from divorce, much of the advice isn’t helpful. You’ll learn that you should have signed a prenuptial agreement or that you should have put your business into an irrevocable trust and then allowed several years to pass so that it cannot be voided. While you have that time machine, you might as well go ahead and create a buy-sell agreement with your business partners to protect your shares.
The truth is that most of us don’t see divorce coming, not until things get really bad, and by that point you don’t have years to prepare and protect your business. So, assuming you don’t have a prenup, a buy-sell agreement, or a trust, let’s look at some real options for protecting your business that you can do right now when divorce is imminent.
If You Have a Little Time…
Maybe you know in your heart that your marriage isn’t working but you can stick it out for a little while longer. If this is the case, there are a few short-term things you can do to help protect your business and give yourself a better standing in divorce settlement talks.
Ease Out Your Spouse
The more involved your spouse is in the business, the more leverage he has to claim an ownership share in the business. If your spouse is working for the business or financially supporting it in any way, begin easing him out as best you can.
Increase Your Salary
Many business owners prefer to reinvest a large portion of their profits back into the business to support growth. However, if your business has a high valuation and you report a low salary, your spouse can argue that they deserve a bigger piece of the business as part of his share of your marital property. You can cut off this argument by paying yourself a larger salary.
Start Saving Money
One way or the other, you’re going to need to pay your spouse enough so that they won’t want to go after your business. The best way to do this is to offer a large payment in exchange for their share of your business. Start saving now.
When the Divorce Comes
If you can’t wait any longer to file for divorce, or if you were blindsided by your spouse’s divorce demand, then your options for protecting your business are limited but not entirely gone.
Your best option is to buy out your spouse’s share of the business. This may mean forking over your savings, stocks, bonds, or even your equity in the house. If keeping your business under your control is important to you, then it’s worth the sacrifice. You can always build back up your investment portfolio or find a new place to live. That’s often a better trade than having a bitter spouse as your business partner or watching as he sells your business shares to a stranger… or even a competitor!
You may not have enough assets or funds to buy your spouse out of his share of your business right away. In this case, you can propose a property settlement loan. It basically works as an IOU that you pay off each month. The drawback of the property settlement loan is that you’ll most likely have to pay interest. This arrangement also shows up as an ongoing debt, which can hurt your ability to get credit or financing for your business.
Sell the Business
The most drastic and difficult option is to sell your business. This probably isn’t what you want to do, but if you can’t buy your spouse out and if they won’t accept a property settlement note, you must consider this possibility. It will hurt selling your business, but it may be better to start over than to have your ex-spouse breathing down your neck and questioning every business decision you make. At least by selling your business, you can cleanly break with your spouse and create a new business that is completely yours.
Want to get more advice on how to prepare for a divorce? Attend the next Second Saturday Divorce Workshop in your area.