Should You “Divorce-Proof” Your Business

According to a research study sponsored by Massachusetts Mutual Life Insurance Company, more than 60 percent of business owners have no plan in place to protect their companies in the event of a divorce. Harris Interactive recently published the results from more than 500 business owners in FamilyPreneurship: What Every Entrepreneur Should Know Before Starting a Business with a Family Member.

The report is timely considering the recent recession. Historically, bad economies have been bad for marriages. With divorce rates hovering around 50 percent, it is logical that more divorce attorneys are seeing family and small businesses as assets to be divided in the marital pot. Despite the divorce statistics, few business owners have considered the impact a divorce could have on their bottom line and even fewer have made preparations to protect their interests.

Businesses that are co-owned by divorcing couples face serious risks. Divorce can paralyze the business and cause employees to “choose sides.” Owners may be forced to sell a business with the proceeds divided by the parties depending upon a state’s statutes on property division or a party’s contribution to the business. Even if a business isn’t co-owned by a spouse, a divorce could still lead to division of the business as a marital asset, affecting decision-making and employee productivity. Owners also have to consider the potential threat the distraction of a divorce can have on the profitability of a business. Divorces, especially messy ones, are stressful, emotional and time-consuming. The attention normally paid to management responsibilities may be misdirected. This sobering information was supported by the study which indicated nearly half of the owners who divorced admitted it negatively impacted their businesses.

With those risks in mind, there are some strategies owners may want to consider with the most obvious being to execute a prenuptial agreement before marrying. For others who build a business after marriage, they may want to consider a buy-sell agreement (which can be triggered by certain events including divorce), postnuptial agreements or trusts. In order to ascertain the appropriate option, an owner should consults with a financial professional experienced in risk-management and wealth-preservation as well as an attorney experienced in family law and/or business break-ups, often referred to as “business divorces.”

The month of January is notorious among family law attorneys as “divorce month” representing the largest volume of new divorce cases each year. As everyone’s thoughts turn to tax season, business owners need to also consider options to “divorce-proof” their companies.

The above is for informational purposes only should not be considered legal advice. Each case is unique and you should consult an attorney for advice regarding your particular situation. Attorney Jill Dimick Chairs the Business Litigation Practice Group of Jocham Harden Dimick Jackson in Carmel, Indiana. She has twenty years’ experience representing parties in business breakups.