Chapter 1: Divorce
The Impact of Divorce on Jointly Owned Businesses
When happy couples walk down the aisle, no one is thinking about divorce. Unfortunately, over 60% of marriages in America end in divorce. People often discuss the effects on children and families, but they rarely address how divorce impacts jointly owned businesses. When it comes to divorce and business ownership, according to the Small Business Administration, 50% of businesses fail due to unintended consequences. These include Divorce, Death, Disagreement, Distress, and Disability — known as the 5Ds.
Protecting Your Business from the 5Ds
At Richard Brothers, we help businesses mitigate the risks associated with divorce and business ownership, as well as the other 5Ds. Our team of Certified Exit Planning Advisors (CEPA®) helps businesses prepare for the unexpected. We also outline the best succession options to ensure long-term continuity. Over the next few months, we will explore how the 5Ds impact businesses and provide resources to help you prepare. In this article, we focus on the first D — Divorce.
Real-Life Example: Divorce and Business Success
Let’s start with a real-life example. A couple started a construction business together early in their marriage. They worked closely on managing the business and it became a top construction firm in the area. When they grew apart in their relationship, they decided to divorce. They both realized that it was best for their family and clients to make things work for the business. Lawyers and financial advisors collaborated in arbitration to determine the business’s value. Together, they negotiated how to fairly divide the assets between both parties. Having professionals involved kept the meetings on track and action orientated. Emotional matters were not discussed at business meetings. In the years that followed, the ex-couple has been able to continue to grow and develop the team, and have plans for their children to take over the business in the near future. This couple successfully managed to handle divorce and business ownership issues.
What Happens if Divorce Threatens Your Business?
This example demonstrates that an ideal resolution is possible in the event of divorce. However, it involved two people who agreed to work together for what was best for their business and their family. What if your spouse, who has a daily role in your business, decides to quit? What will you do if your split is not amicable and you have to continue to work alongside your spouse? How will the tension in your relationship impact your employees and your customers? It’s crucial to consider these aspects when dealing with divorce and business ownership.
Legal and Financial Considerations in Divorce
There are other important factors to consider as well, such as marital property laws and estate planning provisions. Maine follows “equitable distribution” laws, meaning the courts divide property, assets, and debts as fairly as possible. Many business owners hold a significant portion of their wealth in their business. Without proper protection, they risk losing much of it during a divorce. For example, it’s possible that your ex-spouse could receive a substantial portion of stock during a divorce and become an uninvited partner in your business. Therefore, weighing the legal and financial aspects of divorce and business ownership is essential.
How to Protect Your Business From Divorce
There are many ways a divorce can hurt business or even force a closure, but the good news is that you can put plans in place to protect your business. Here are three tips to help reduce the chances of your business failing because of divorce and business ownership issues:
- Create a prenuptial agreement (or postnuptial agreement).
- Separate your personal finances from your business finances.
- Work with a Certified Exit Planning Advisor (CEPA®) to create an Exit Plan that protects you and your business.
Take Action Today to Protect Your Business
Are you doing everything you can to protect your business? At Richard Brothers, our team is trained to help you identify and assess business risks, including divorce and business ownership issues. Contact us today to have a confidential conversation with our CEPA® team and ensure the continuity of everything you’ve built.
