How to Protect Your Business from Divorce

Divorce can be a messy affair. Roll a business into the equation, and divorce can become emotionally and financially devastating, not just for the divorcing couple and their family, but also for the business's employees and co-owners. At least some of the grief and expense can be avoided by taking preventive steps, which can include the following.

Instructions

Difficulty: Challenging

Things You’ll Need:

• Cool heads
• A knowledgeable lawyer, with common sense and an interest in helping you solve problems rather than creating conflict

1. A good lawyer is worth the money Start with a good lawyer. Ideally, find one who already knows your business and also understands how to be tactful in helping both parties understand the value and importance of making mutually-beneficial decisions.
2. If you own a business and are about to get married, draft a pre-nuptial agreement before you tie the knot. Specify that the business is your individual property. Though state laws vary, it is possible that, even in many community property states, business assets brought to a marriage can be kept separate.
3. Keep in mind that a pre-nup is not all negative. Ideally, it protects both parties, as well as their children, especially in second marriages, or in the event of the death of either the wife or the husband. The idea is to de-emphasize protecting your property from divorce and to emphasize the importance of protecting everyone's interests in the event of death. This is key.
4. If you are already a couple, consider a "post-nuptial buy-sell agreement." This document should provide a formula for valuing the business in the event of a divorce or death, and specify who gets what. The problem here, of course, is that if you are contemplating such an agreement, there is already trouble with the marriage. Getting both parties to come to terms can be tough.
5. To assure that a multi-generation business stays within the family if a member divorces, consider a Family Limited Partnership arrangement. These versatile estate transfer tools can specify that business interests are not subject to division in divorce.
6. To reduce the destructive impact of divorce, keep clean records. Produce records voluntarily, and don't play games with retained earnings.
7. Try to compromise on how the business should be valued and on reasonable income for support. That way, both of you come out in better shape.
8. Make sure everyone's financial needs are addressed. Since most conflicts ultimately center around money, take steps to cool tempers. This can be done with trusts, as well as with life insurance. For instance, much of the sting of pre-nuptial agreement that keeps a $1 million business in your name can be reduced with a $1 million life insurance policy on your life, with your spouse named as owner and beneficiary.

Tips & Warnings

• Get good information from a good attorney. He or she can help you understand the importance of a pre-nuptial or other legal documentation in order to protect everyone involved.
• The biggest problem: The business is often the most valuable asset in the marriage. This can make it the biggest bone of contention in the divorce settlement.
• In the majority of divorces, the business suffers because of additional costs for legal and accounting services, inattention from stressed-out, depressed or preoccupied owners, loss of employees, loss of customers, or the failure of the owner to take advantage of business opportunities.
• Valuing the business is a major flash-point of conflict. That's because the spouse who wants to retain the business is tempted to low-ball the value, while the other wants it valued as high as possible.
• If divorce is imminent, remember that the business is the goose that lays the golden eggs, and no one benefits if it is killed. You both need to control the process and maintain avenues of communication. Otherwise, lawyers' fees can consume assets, and there may be nothing left of the business by the time the dust of divorce settles.