Happy Valentine’s Day! A day to purchase heart-shaped everything, visit your local florist for a bouquet of red roses, and celebrate romance with your loved ones.
If you have been following our blog for the past few years, you may have noticed that we have a little tradition on February 14. Because while some spend the day talking about love and marriage, someone has to talk about the other side as well. That’s right: divorce.
So… Welcome to year three of our annual “Valentine’s Day Divorce Article” series.
Exiting the Business Due to Divorce
A divorce could lead to dissolving your business. Forbes says, “if your spouse is entitled to a big cash payout for his or her share of the value of your business and you don’t have the liquidity, you may be forced to sell or close the business in order to pay your spouse. Another scenario could include a culmination of negative events: disruptions to your operations and team resulting in poor communication with customers and business partners, bad press that damages your brand reputation and discourages people from doing business with you”. It is important to have an exit plan in case of a divorce.
Spouse Involvement in Business
If you and your ex are in business together, the negative impact on your business could be widespread. Your divorce will not only financially impact your personal life, but if your ex had an ownership stake in the business, you are professionally impacted financially as well. What is to come of their shares if they decide to sell their portion of the business?
Marital Property Law
Does your buy-sell agreement include stipulations for future stakeholders? If you and your spouse collectively had majority control of the business, and they decide to sell their portion, are you prepared to no longer be in control of your organization?
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. According to Business.com, “If your ex receives a substantial portion of your stock during the settlement, they could become an uninvited partner, throwing the business into chaos. Further to this, your interest has been diluted, possibly causing your status to change”. Not to mention the stress that comes from working with your ex-husband or ex-wife.
Working With Your Ex
Additionally, if your former spouse decides to stay at the company, how will you manage the unavoidable tension between the two of you? Business.com says, “Suppose your spouse is currently or was ever involved in the business, especially in a senior capacity. In that case, the situation gets even more complicated, as they still have a say in the day-to-day operations. They may have received a portion of your stock, as well, increasing their position”.
How will you ensure that your employees do not choose sides and negatively impact the working environment? These are the questions you must ask yourself when working with an ex-spouse, or your business could crumble from the negative disruptions.
Estate Planning Considerations
Not enough business owners consider the impact trusts and proper estate planning will have on their life prior to their exit. Kevin Entwistle, Family Wealth Director, Private Wealth Advisor, and Vice President at Morgan Stanley Private Wealth Management says, “From a financial standpoint when one spouse owns or co-owns a business, the other is often entitled to a payout or some allocation to that ownership interest, which is based on the non-owning spouse’s employment in that company or contributing some value to the operation of the business, or their indirect efforts offering support in a way that provides the owner spouse to help the business succeed.”
For high-net-worth individuals, estate planning often includes minimizing the impact of estate taxes. As such, business owners and their advisors must ensure they are planning for all possible outcomes that may occur to the owner, including divorce.
Kevin continues, “When it comes specifically to spouses, and closely held businesses that are worth more than the gift and estate exclusions, we sometimes suggest the spousal lifetime access trust (SLAT) as one estate planning tool that may address the issue of minimizing tax implications. A SLAT is simply an irrevocable trust created during a spouse’s lifetime. It allows the married spouse to remove assets from her estate (the business owner for example), such as a closely held business interest, while still benefiting from trust income indirectly through the owner’s spouse.”
Creating a Solid Exit Plan
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 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.
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