How Can I Safeguard My Business During Divorce Proceedings?
When individuals consider the negative ramifications of a divorce, they often focus solely on the effects it has on the home and family unit. However, divorce has the capability of negatively impacting the finances of a business which potentially interferes with the lives of many Americans. According to the Harvard Business Review, divorce costs the American workplace as much as $150 million on an annual basis. Therefore, it should come as no surprise that divorce can have wide-ranging negative impacts on your business.
Understanding the potential impacts is one way you can protect the long-term success of your company:
Firstly, divorce has the potential to disrupt day-to-day operations. Divorces demand attention, diverting focus away from management responsibilities. The emotional and mental demands of the divorce process can lead to distractions and reduced concentration on work. Business owners or key employees going through a divorce may experience decreased productivity, increased absenteeism, or challenges in making important business decisions. This disruption can have a direct impact on overall business operations and potentially affect profitability.
Secondly, divorce can significantly impact business partners and employees. If you hold any ownership interest in your business, that business may be subject to division during a divorce. In Ohio, a business can fall under either the marital or separate property classification. It is separate property if the spouse who owns the business started it before they were married. The business would be marital property if it were founded or invested in after the marriage. However, it is also important to remember that a separate asset can turn into a marital asset if the couple works together on scaling the business during the course of the marriage, increasing its value.
If the asset is found to be marital property, courts will divide equally in a manner it considers to be “equitable.” Upon a fair division of the business, ex-spouses can potentially acquire a share of the business, resulting in a reduced stake for the divorced business partner. Moreover, the uninvited ex-spouse, who now holds shares in the company, might choose to sell them, leading to a negative effect on the company’s ownership values. This situation can have implications for the stability and value of the business such as needing a costly business valuation.
Protecting Your Business in Advance
While divorce is not a topic individuals want to consider before or during the course of the marriage, divorce affects nearly 50 percent of marriages. Marriage divorce statistics reveal that there is a divorce occurring somewhere in the US roughly every 36 seconds.
Fortunately, there are measures you can take to safeguard yourself and your business in order to prevent or mitigate the risks:
Firstly, business partners may choose to create prenuptial or postnuptial agreements* that outline the distribution of the business in the event of a divorce. Within the agreement, the parties may choose to establish that the business will not be subject to marital distribution. Further, parties may choose to agree on whether a spouse will share in the appreciation or depreciation of your business during the marriage as well as a formula for how it would be valued.
Secondly, if your spouse holds a share in the business, it is advisable to obtain a buy-sell agreement to safeguard your business interests. A buy-sell agreement provides a clear overview of actions that will be taken in the event of a divorce. It specifies how the price of your spouse’s share of the business will be determined and outlines the steps to be followed. This agreement offers valuable protection and clarity in navigating the potential impact of a divorce on your business. Specifically, according to Attorney Joe Balmer, buy-sell agreements are beneficial in restricting the transfer of ownership interests which in turn stabilizes the business and its value.
Thirdly, as you manage your business, it is essential to shield it from the potential effects of divorce by maintaining detailed records of all business capital sources and clearly distinguishing between premarital and marital funds. Further, keep business and personal expenses separate. By doing so, you establish a clear demarcation between the financial aspects of your business and personal matters, which can help safeguard your business during divorce proceedings.
While divorce has the potential to damage your business, smart planning now can help you protect it. Although these solutions may not resolve all the challenges that may arise, they can help you prevent problems that may otherwise arise after your divorce. By taking smart and preemptive measures, you can mitigate the potential damage to your business and increase the chances of its long-term success.
* As of the end of March 2023, postnuptial agreements became legal and enforceable in Ohio. Click here to read more about the law.
PUBLISHER’S NOTE:
I want to thank McKenna Hinkebein, who is externing with us this semester, for brainstorming with me and writing this article. She will be graduating from the University of Dayton School of Law next May. Well done McKenna! Great to be working with you this summer.
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© 2023, Ohio Family Law Blog. All rights reserved.
McKenna Hinkebein is externing with Dayton law firm, Holzfaster, Cecil, McKnight & Mues this semester. She will be graduating from the University of Dayton School of Law next May 2024.
