Going through a divorce is tough – try throwing a business into the equation and it makes things even more complicated. But if you own a business – on your own or with your spouse – there’s no separating your company holdings from your personal holdings. It’s all on the table.
Divorces and Business: A Complicated Concoction
Divorce is never easy, no matter the circumstances. Not only is there an emotional factor, but there are also plenty of practical issues at play – including the separation of assets.
The good news is that the U.S. divorce rate is at a 40-year low. For the third year in a row, the rate has dropped off. In 2015 – the last year for which full data is available – there were just 16.9 divorces per 1,000 married women. At the same time, marriage rates have increased. And while researchers often cite statistics that say marriages have a 50-50 chance of working out, it’s more like 60-40 these days.
Divorce rates may be on the decline, but that doesn’t help you very much if you’re on the wrong side of the statistic. And if you own a business, your split is guaranteed to be complicated. Your spouse – and the team of lawyers representing your spouse – will try to get whatever they can. So, it’s up to you to keep them at bay.
5 Tips for Protecting Your Startup
Divorce-proofing your startup requires a strategic and concerted effort on multiple fronts. And, as a general rule of thumb, the sooner you start protecting your business, the easier it will be to keep it in your hands. Here are some practical tips:
1. Spell Out Pre-Existing Business Assets
The best-case scenario is that you started your business prior to the marriage. If this is the case, you should clearly spell out your pre-existing business assets before getting married and have your spouse waive future rights to the company. A family lawyer can help you draw this up as part of your prenuptial agreement.
2. Document Your Spouse’s Lack of Involvement
If you start the business while you’re married, then the business will most likely be on the divorce table. At this point, the best possible scenario is that your spouse has very limited involvement with the company.
“A spouse who lacks involvement has a reduced claim to the business value,” Inc.com explains. “It is best if your spouse is not an employee, does not contribute to the business’s management, and does not provide ideas or business innovation advice. If you are still in the pre-divorce stage, start to document your spouse’s lack of involvement in your business.”
3. Pursue Mediation
If your divorce is fairly amicable and both you and your spouse are mature and financially independent, then you might be pleasantly surprised to learn that your spouse doesn’t have a huge interest in latching onto your business. Divorce mediation may be something worth pursuing.
“In the mediation process, a neutral mediating attorney guides a discussion with the aim of uncovering areas of agreement and disagreement in order to reach solutions to outstanding problems,” attorney Rowdy G. Williams explains. “Each party is represented by an attorney who can protect their client’s interests.”
4. Take a Fair Salary
You might think you’re doing a good thing by only taking a small salary from your startup, but it could actually hurt your situation when it comes to divorce. Your spouse’s lawyer might see your small salary as a way of starving the family’s cash flow. It’s far better if you pay yourself a normal salary and provide for the family during the divorce process.
5. Get a Fair Valuation
Sometimes there’s just no way of keeping your spouse’s hands off your business – especially if they’ve been heavily involved or have a leadership stake in the company. In this case, you’ll probably end up owing them a portion of the business. More than likely, you’ll have to buy them out.
The key here is to get a fair valuation of the company. It’s best to use a neutral, court-appointed valuation professional so that there aren’t any issues. If the company is overvalued, you could end up paying more than necessary. But if it’s fairly valued, you can rest easy knowing you didn’t get ripped off.
Don’t Let Divorce Destroy Your Business
A divorce represents the end of your marriage, but don’t let it mean the end of your business. The best thing you can do is start early. By divorce-proofing your startup on the front end, you’ll have much better grounds for protecting it on the back end. But even if you suddenly find yourself in a divorce without much preparation, there are steps you can take. Meet with a lawyer to discuss your options.