Going through a divorce is trying for everyone involved, but worrying about losing a successful business throughout the process can make matters worse. Business owners risk losing everything they have built during a divorce because of Arizona’s community property laws or because an owner has to raise cash. Without a prenuptial agreement in place to protect your business, your spouse has a stake, even if he or she did not contribute the blood, sweat, and tears that made your business a success.
If you are having marital issues and suspect a divorce might be in your future, it’s imperative that you take action now to preserve your business. Below we provide some strategies you can employ so you do not have to lose your business during a divorce.
Strategies to Preserve Your Business During a Divorce
If you are married and live in Arizona, your business is likely a joint asset, unless you have a prenuptial agreement that states otherwise. The following strategies can help you to avoid losing your business during a divorce:
Keep Impeccable Records
If you aren’t keeping detailed financial records and you haven’t been separating business and family finances, now is the time. Entanglement between business and family finances is a bad practice that becomes even more difficult when divorce is involved. Poor record keeping creates challenges when you are trying to accurately value your business and split assets during a divorce. You have no chance of buying your spouse out of the business or coming to a compromise when you cannot distinguish what is what. Additionally, accurate and detailed records support your case in front of a judge, if you cannot reach an agreement prior to your divorce hearing.
Pay Yourself Well
Often times business owners take a small salary and reinvest profits to build and grow their business. If you continue to pay yourself a low salary, you potentially give the court a reason to give more of your business’s profits to your spouse. Instead, start paying yourself a higher salary before a divorce, so fewer profits are available to distribute between you and your spouse.
Arrange for an Independent Business Valuation
Whether you are planning to file for divorce or amidst proceedings, you need to know exactly what you are working with before you can make any concessions, compromises, or decisions. Hire a neutral valuation specialist to review your financial records and place a value on your business. You can likely get a court-appointed specialist if one of you has already filed for divorce. Always get a second opinion before you agree on a particular value, so any decisions about distributing profits start from an agreed-upon number.
Reduce Your Spouse’s Role in the Business
The greater a role your spouse has in your business, the stronger case they have against you to receive a share of the profits. The same applies if your spouse has worked at the business for a long time. One of the best things you can do to preserve your business during a divorce is to reduce his or her role as soon as possible. Simply firing your spouse might not be the best course of action, so you should definitely consult with an experienced divorce lawyer. Until you get the chance to do so, a gradual reduction of responsibilities will begin the process of separating your spouse from the business.
Compromise with Other High-Value Assets
Sometimes divorces are so contentious, that one spouse will figuratively do everything to blow up assets, which hurts both and impacts the lives of children. If you are on reasonable terms and discuss an amicable situation, consider compromising other assets to avoid having to dissolve or lose your business. For example, you might offer your spouse your house, retirement accounts, a vacation home, or all the vehicles in exchange for complete ownership of the business. If your business continues to thrive, you can replace high-value assets more easily than rebuilding a business. Compromise doesn’t have to be all or nothing. You can also compromise a portion of profits for a minimal amount of time to retain ownership.
Sell a Minority Stake in Your Business
It’s unlikely you will have to sell your business to satisfy a divorce settlement because you won’t have the income you need to satisfy spousal support or child support payments in the future. Yet, divorce can leave you cash-strapped, forcing some owners to sell. Avoid dissolving your business for cash by selling a stake to raise some capital. You could implement an employee stock ownership plan or consider finding an angel investor who will offer funding in exchange for a partial share of your business.
Extend Your Payments to Your Spouse
If your divorce has been finalized and you owe your spouse a significant amount of business profits because of a buy-out, paying it all at once could mean financial catastrophe. At the very least, it could hinder growth. Instead, arrange to pay your ex for his or her share of the business over time. You can make monthly or quarterly payments from your business’s cash flow or if necessary, secure a business loan.
You Don’t Have to Lose Your Business, Contact a Divorce Attorney Today
Divorce is an unpleasant life event that can be devastating to business owners. Some couples who own businesses manage to succeed personally and professionally. Yet, in other cases, the marriage falls apart while the business thrives, forcing couples to figure out how to divide the business without dissolving it. Divorces involving businesses are especially complicated and expensive, especially if the case needs to go in front of a judge. The skilled divorce attorneys at DeShon Laraye Pullen PLC understand the gravity of your situation, and we are here to help. Contact us today online or at 602-252-1968 to schedule an initial consultation to discuss your marital status, the particulars of your business, and potential strategies to help you avoid losing your business during a divorce.