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 small company 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 company, 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 results?
One approach is to begin by determining a likely outcome of any divorce agreement. Speak 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 company from a reputable source. Depending on what’s practical, you might use an appraiser who is acceptable to both spouses or just hire one on your own. Either way, this should help you to get an idea of what your obligation might be when terms are finalized.
Say your attorney indicates that your spouse could be awarded half the value of your company, and the business is valued at $3 million. You’ll know that your spouse could receive in the neighborhood of $1.5 million from your company’s value after a divorce.
With such knowledge, you can decide how to proceed. Should you put your company up for sale and divide the proceeds, pursuant to the divorce settlement, then start a new business of your own? Sell some shares to a more desirable partner to raise cash to buy out your spouse? Just hand over the shares and live with your ex as a co-owner? Or do you really want to maintain your current ownership in your existing firm?
Assuming you want to keep your company 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, collectibles, 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 might 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 company) 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 might be over many years.
Ending a marriage is seldom pleasant, but the financial damage may be reduced 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 hold down legal costs and get back to work without divorce on your mind.
Often, the best way that a business owner can minimize the financial fallout from a divorce is to plan ahead. If you own a company and plan to get married, suggest a prenuptial agreement that designates your company as an asset you’ll retain. Bringing up a prenup before a wedding may not be the most romantic move you can make, but you might be able to deflect the blame by telling your intended spouse that such an agreement is your CPA’s idea.