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How to Divorce-Proof Your Business

It can happen to the best of entrepreneurs. While a new business owner is putting in long hours to build a business, a marriage can fray. The next thing the owner knows, his or her spouse may be filing for divorce.

This scenario is all too common. Forty percent to 50 percent of all first marriages in the U.S. end in divorce, according to a 2010 report by the National Marriage Project at the University of Virginia. The divorce rate for second marriages is even higher.

How to Divorce-Proof Your Business

For those whose marriage is in trouble or who are about to begin a divorce, a few strategies can help preserve a business. Once the divorce proceedings start, entrepreneurs won’t likely be able to implement some other legal maneuvers that, if accomplished in happier times, could keep their business from landing in a soon-to-be ex’s possession.

Businesses Can Be Destroyed By Divorce

If you’re not careful in a divorce, you could find your ex is your business partner — or you could be fighting to keep your enterprise from being sold to raise cash.

Or you might lose the business to your ex. That’s what happened to Tereson Dupuy, founder of FuzziBunz, an online cloth-diaper business based in Lafayette, La.

Dupuy launched the company three years into her marriage after seeking better diapering options for her second child. But in 2005, close to the couple’s 10-year anniversary, the marriage unraveled. Dupuy discovered FuzziBunz would be considered a joint marital asset. Louisiana is one of a handful “community property” states, including California, which assume each divorcing spouse owns half the property accumulated during the marriage.

Dupuy says the stress of the divorce drove her into a nervous collapse and within 24 hours a judge put her husband in control of the company.

It took Dupuy a year and a large lump-sum payment to her ex — plus $15,000-a-month payments to her ex over many years — to regain ownership. The payments drained cash, and bankers considered her need to pay them outstanding debt, making it hard for her to borrow needed growth capital.

Is your marriage headed toward a divorce?

Here are seven strategies to consider if a divorce is threatened or already underway and your company is considered a joint asset.

  1. Keep the family’s finances separate from those of the business. “Don’t borrow out of the house [account] to buy company trucks,” Kornitzer says.
  2. Pay yourself a good salary. If you starve the family’s cash flow to build the business, a lawyer might later make the case that your ex is entitled to more of the company’s assets.
  3. Fire your spouse. If your spouse is actively involved in your business, ease him or her out as soon as possible, says divorce lawyer Daniel Clement, principal of New York City family law firm Clement Law. The more prominent the ex’s role and the longer he or she worked in the business, the stronger the case a lawyer could make that this spouse helped build the enterprise and should profit from its growth.
  4. Sacrifice other assets. In a divorce settlement, a couple’s total assets are added up and then divided. Try to retain 100 percent ownership of the business by forfeiting other assets instead, such as retirement accounts, the family’s home, vehicles or collectibles, Clement says.
  5. Get a fair valuation. Use a neutral, court-appointed valuation professional and then arrange for another outside party to review the figure before you agree to it, Clement says. Dupuy wishes she had challenged FuzziBunz’s valuation, which was based on a projection of 10 years of future growth rather than current revenue, she says.
  6. Arrange to make any payments over time. It’s common to pay an ex for a share of a business gradually, as Dupuy did. The monthly payments can come from the business’s cash flow or a bank loan.
  7. Raise capital by selling a stake. You could sell a minority stake in your business to employees through an employee stock ownership plan, Landers says. Or find an angel investor or two who will pay cash in exchange for an ownership stake.

One bright spot for entrepreneurs: It’s rare that a business ends up being sold off to satisfy a divorce settlement, Clement reports. That’s because it would deprive the business owner of the future income needed to pay support payments.

Preventive Moves To Protect Your Business in Divorce

Take action while your relationship is still rosy and you may greatly increase your odds of surviving a divorce with your business intact.

 

Here are five pre-emptive strategies that can help protect you from losing your business in a divorce.

 

  1. Sign a prenup. If your business existed before you wed, designate it as separate property owned by only you.

 

  1. Secure an early postnup. This is much like a prenup, except the agreement is signed after the wedding. If a postnup is done long before the marriage disintegrates — ideally more than seven years before a breakup – it might be useful in defining a business as separate property. But judges often view postnups skeptically.

 

  1. Place the business in a trust. This keeps the business from being counted as a marital asset as you no longer personally own it. The move also protects the value of the company’s growth.

 

  1. Create a buy-sell agreement. It defines what happens to a business should any owner’s status change, as is the case in a divorce. The agreement might limit a spouse’s ability to acquire ownership, deprive a divorcing spouse of voting rights, or give you or other partners the right to buy at a low, preset price any interest awarded the ex.

 

  1. Have insurance. A whole-life insurance policy that builds cash value can be liquidated to provide the funds to buy out a spouse’s share of the business, if need be.

Free Consultation with a Divorce Lawyer in Utah that Can Protect Your Business

If you have a question about divorce law and how to protect your business in a divorce case in Utah call Ascent Law at (801) 676-5506. We will help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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Michael Anderson

About the Author

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.