For those of you who have followed the Exit Planning Institute blog for a while, you know what today is all about. That’s right: Divorce.
While other businesses and organizations celebrate true love and wedded bliss this Valentine’s Day, we continue our tradition of discussing divorce on Valentine’s Day for the fourth year!
So let’s get into it.
12% of business owners shared that their spouse was their most trusted advisor in our recent 2023 National State of Owner Readiness Report. The selection of “Spouse” was the fourth most trusted advisor behind Financial Advisors, Lawyers, and Accountants. Additionally, of business owners who have established a formal transition team, 31% indicated their spouse was a team member.
If one of your most trusted advisors is your spouse and you end up dissolving your marriage, how will that impact your business? If your spouse is currently or was ever involved in the business, especially in a senior advisory capacity, this can severely impact your business.
If your spouse was not the sole advisor on your exit planning transition team, you are better prepared for the rest of your advisory team to pick up the slack to fill that most trusted role. However, if you are part of the 78% of owners in our 2023 National State of Owner Readiness Report who indicated they had not established a formal transition advisory team, you might see a decline in your business readiness once you and your spouse divorce. With a dedicated transition team, consisting of advisors outside of the business and the owner’s family, they are well-positioned for a successful and significant exit.
It is estimated that 50% of the exits in the United States today are due to unplanned events. Destroyers of companies that the Exit Planning Institute calls the “5Ds.” These are divorce, death, disability, distress, and disagreement. In the 2013 National State of Owner Readiness Report, one of the better-reporting statistics from owners is that at a minimum they had some contingency plans in place to combat these “5Ds” if they were to happen. In 2013, 40% of owner respondents said they had written contingency plans. This statistic is up in 2023 as 59% of owners surveyed during the National State of Owner Readiness Report stated they have written contingency plans. In addition, 22% of 2023 respondents said they have plans but they are not formally documented.
Without preparing a business should it be impacted by one of these stressors, owners are risking their livelihoods. 80% of an owner’s wealth is locked in their business, and by failing to create detailed contingency plans and legal safeguards for their business, they stand to lose the majority of their wealth in an unplanned exit.
Good contingency planning includes risk reduction strategies and policies to protect against everyday disaster situations that lead to distress. To limit the impact of these stressors on a business, owners must incorporate contingency plans into their business processes.
Marital Property is defined as “all income and assets acquired by either spouse during the marriage.” This includes money in a savings account, stocks and bonds, and other assets – like your business. Marital Property can be either separated as Community Property or through equitable distribution. Nine US states currently distribute Marital Property as Community Property. That means that every asset is split between the two parties evenly, 50% to one party and 50% to the other. The remaining states utilize equitable distribution, and the final disbursement of assets is determined through a lengthy court process until the former couple decides what is fair.
Depending on how your assets are distributed, you may end up with less stake in your business. For example, if you were a majority shareholder with 51% of the business in your name, through Community Property distribution, your ex now has 25.5% control of the business, and you have lost the majority shareholder position within your company. Someone who previously had no stake in the business now controls more than a quarter of it.
The best way to ensure you are prepared for an eventual business exit is to create a well-organized Exit Plan. An exit plan that includes your business, personal, and financial needs will provide you with the stability you need in case of an unexpected exit from your business. Building value in your business is not only a good business strategy but also a good security net in case of a divorce.
Having proper governance standards in place will be critical, and having other successors being groomed in the meantime is important because if one or both end up stepping down as leaders, it will be a messy transition for the next owner to step into their shoes if not yet fit for such a role or capable of handling the responsibility.
Read our past Valentine’s Divorce Articles below!
Happy Valentine’s Day… Now Let’s Talk About Divorce
Are You Married to Your Business?
Love is in The Air… But So Is Divorce
Learn more about Divorce and the other 5 Ds in our content package here!