Divorce can be emotionally and financially taxing for anyone, but the stakes are even higher for small business owners. A small business is not just an asset but can also be a source of livelihood, passion, and identity. When a marriage ends, the impact on your small business could be profound, affecting not only you as the owner but also your employees, customers, and the local community.
We took the time to research the complexities faced by small business owners during divorce. In this article, we’ll explain what crucial aspects you need to know about, like business valuation, the impact on operations, and strategies for navigating this challenging time.
Business valuations for divorce proceedings
One of the most contentious parts of a divorce for a small business owner is the valuation of the business. Determining the worth of a company or store is complex, and to do it, you may need the help of a legal and financial professional.
Usually, businesses are evaluated based on their assets and liabilities, income projections, or market value compared to other companies of the same type in a similar location.
In an asset-based valuation, the most common type for divorces, tangible assets (like real estate, equipment, inventory) and intangible assets (such as intellectual property, brand value, and customer relationships) are evaluated and assigned a value. The business’ liabilities (what it owes) are then calculated, and a net asset value is determined by subtracting the total liabilities from the total assets. This number represents the value of the company’s equity.
The impact of divorce on business operations
Divorce can disrupt the daily operations of a small business in several ways. The first is the financial strain, which is touched on above, but there are also operational challenges. If both spouses are involved in the business, roles and responsibilities may need to be redefined, and the emotional turmoil of divorce can affect decision-making and productivity. Employees and clients might become uneasy about the future of the business, potentially leading to turnover and loss of business.
The division of a small business during a divorce differs from state to state, depending on multiple factors such as whether it’s in a community property state or an equitable distribution state. Additionally, the courts have to consider spousal involvement in the business, prenups and postnups and debt ownership, amongst other things.
How to protect your business from the negative impacts of a divorce
Protecting your business during a divorce requires careful planning and strategic decision-making. Some tips to help minimize the impact of a divorce on business finances and operations include:
- Prenuptial agreements: These can outline how a business will be affected in the event of a divorce, offering a clear plan to help mitigate future disputes.
- Buy-sell agreements: This agreement between business partners specifies what happens to a business share in the event of a divorce. It often includes a clause restricting the transfer of shares without the other partners’ consent.
- Fair compensation: Ensuring that the non-owner spouse is fairly compensated through assets or cash can be a way to keep full ownership of the business.
- Using a mediator: Engaging in mediation can help couples reach amicable solutions while minimizing the impact on the business.
It’s important to note that while you can handle a divorce yourself, hiring an attorney to help you minimize the effect on your business can be helpful. A qualified attorney, for example, can provide guidance and representation to help keep your divorce amicable and reduce the impact on your business. Engaging a financial advisor, accountant, or valuation expert could also be an excellent way to accurately assess the business’s value and advise on financial decisions. Finally, a tax professional may be able to provide advice in this area, so you avoid unexpected tax liabilities.
Divorce is tough on everyone
Divorce for small business owners is loaded with complexities that go beyond personal and emotional challenges. Using strategies like prenuptial agreements, fair compensation, and legal and financial assistance, can help small business owners navigate these rough waters and potentially emerge with their personal and professional lives intact.
