Savvy business owners prepare for the inevitable ups and downs any industry must learn to weather. But when it’s a family-owned business, one risk for which many are ill-prepared is the threat of a divorce between one of the principal owners and a spouse.
With roughly 50 percent of all first marriages ending in divorce — and the rate only climbs skyward for subsequent unions — it’s prudent to have a plan in place in case this becomes an eventuality in your own situation.
When couples own a business together
Maybe it’s a tech start-up that really grew legs and made an impact on the industry. You and your spouse started small, just a garage- or spare bedroom-op, but now its worth is in the mid-six figures. Yet, having not gone public, most of your net worth is linked to your baby, the business. If the two of you split, neither has the funds to buy out the other spouse.
Your options may be limited to selling your business to split the profits (and likely signing some heavy non-compete agreements with the eventual buyer) or taking on debt to buy the other out.
If it’s too late for a prenup to protect you, you may be able to draft a buy-sell agreement that can avoid losing your business to divorce. The contract dictates specifically what occurs if or when one business partner passes away or opts out of the business, as in a divorce.
This way, an ex can be required to divest any settlement interest in the business back to the owners at a pre-determined valuation formula that also takes into account current economic trends and conditions so neither party gets the bitter end of the stick.
When it’s a family-owned business
When you work for the family business and divorce, your spouse can have his or her hand out for a slice of the family pie whether he or she worked for the business or not. The best way to shield assets in a family business is to use a trust.
This protects the business and can provide for generational wealth. Here’s one way a trust can save assets from a divorce settlement.
A parent gifts an adult child several million dollars of stock in the family’s business, but allocates those assets to a trust with the son or daughter as sole beneficiary. If and when that adult child divorces, the proceeds are untouchable — as long as there was no commingling.
Divorce, but continue to co-own the business
This solution will not work for all, or perhaps even most, couples. Few things can drive down your morale quicker than having to show up for work daily and face the spouse from whom you split. It gets even rockier when one spouse enters into a new relationship or remarries.
But there are couples who find ways to make it work, perhaps working alternate shifts, in different departments where they rarely interact or even in another off-site facility. If you feel like this is something that could work for you, draw up a shareholder agreement with the option that either can buy out their former spouse as long as the price is mutually agreeable.
As always, before making any moves, make sure that you learn all of the legal ramifications of each of your options.