Divorce is never easy and almost always brings major financial consequences. In the aftermath of a divorce, most men will suffer a 10 to 40 percent drop in their standard of living, and one in five women will end up living below the poverty line. When facing a divorce with a business involved, the stakes get even higher.
Fortunately, there are some steps you can take now to ensure that dividing a business in a divorce happens fairly and equitably. Here’s what you need to know.
Proactively Preparing for Divorce with a Business Involved
Although nobody wants to think about getting divorced, proactively preparing your business before you have problems is one of the smartest things you can do. Start with these four simple steps.
1. Sign a Prenup or Early Postnup
If you owned your business before you got married, a signed prenuptial agreement designates it as an asset that’s separate from your marital assets. Although a judge will often be skeptical of a postnuptial agreement, it might hold some weight if it’s been in place for at least seven years since your divorce.
2. Set up a Buy-Sell Agreement
A buy-sell agreement describes exactly what will happen if there’s any change in the ownership of the business. This is particularly important in cases when a company is organized as a business partnership. Having a buy-sell agreement in place during a divorce can limit your spouse’s ability to take over ownership and might give you or your partner the right to purchase the business at a low pre-set price.
3. Purchase a Whole Life Insurance Policy
Whole life insurance policies build up cash value. If you need to buy out your spouse’s share of the business, this policy can be a good source of funds.
Protecting Your Business During the Divorce Process
If you’re already talking about filing for divorce, it’s likely too late for proactive measures. Here are a few things you can do to keep the business together during the divorce process.
1. Separate Your Business Assets (and Keep Good Records)
To avoid any further confusion, don’t use any personal assets to fund your business expenses. For example, avoid pulling money out of your family’s savings to buy a company work truck. Make sure you’re taking a fair salary and leave any extra business revenues in your business account.
2. Get a Fair Valuation
When it comes to separating assets, business valuation matters. Make sure this is done by a neutral, court-ordered professional. If you don’t agree with the valuation, you can also get a second opinion before you agree to it.
3. Prepare to Sacrifice Other Assets
Often, your ex-spouse will find the value of the business more appealing than actually owning it. You’ll have a better chance of retaining 100 percent ownership of your business if you’re willing to give up other assets like cash and retirement accounts.
Get Your Business Back on Track After a Divorce
Successful business owners are always looking for ways to improve their business and sharpen their skills. After you survive divorce with a business involved, you’ll likely have to work even harder to get things back on track.
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