With Valentine’s Day quickly approaching, you can feel love in the air. Red and pink hearts decorate stores, chocolate and teddy bear sales have gone through the roof. While this time of year can bring out the hopeless romantic in some of us, it can bring out the cynic in others. For those that are cynics, 50% of marriages end in divorce, and divorces can be messy – especially for a business owner.
It has been said that 50% of businesses fail because of the Five D’s – Death, Disability, Distress, Disagreement, and that right: Divorce. While it might not be the direct cause of your business failing, divorce can impact your business more than you think.
Marital Property Laws:
Marital Property is defined as “all income and assets acquired by either spouse during the marriage”. This includes money in a savings account, stocks and bonds, and other assets – like your business. Marital Property can be either separated as Community Property or through equitable distribution. Depending on how your assets are distributed, you may end up with less stake in your business. Which can change your business situation.
Spouse Involvement in Business:
If you and your ex are in business together, the negative impact on your business could be widespread. You may have to consider and ensure that if they stay on board in the business employees don’t take sides and negatively impact the business environment.
Exiting the Business Due to Divorce:
A divorce could lead to dissolving your business to pay for his or her share of the value of the business if you do not have the liquidity. Disruptions to your operations or team resulting in poor communication with customers and business partners, bad press that damages your reputation can also be factors that cause you to dissolve your business as a result of a divorce. It is important to have an exit plan for this reason.
To limit the chances of your business failing due to a divorce, here are some tips:
Create a Pre-Nuptial or Post-Nuptial Agreement:
Although it might not seem like something to do, a Prenup is one of your first lines of defense in protecting your business from being split into two. When drafting the prenup, consider two things: should the company be considered joint marital property or as an individual’s property and the company’s agreed value at the time of divorce and whether any appreciation of assets gets passed on.
Separate Personal & Business Finances:
Even if you are not going through a divorce, it is critical to separate records for your personal and business finances. It will allow you to have accurate statements when it comes to expenses and assets. Try not to use collateral in your home to invest in your business to limit confusion in what belongs to whom in asset distribution.
Make a Well-Organized Exit Plan:
The best way to ensure you are prepared for an eventful business exit is to create a well-organized exit plan. This plan should include your business, personal, and financial needs to provide stability in case of an unexpected exit from your business. It can also be a good security net incase of a divorce. To create your exit plan, meet with a Certified Exit Planning Advisor (CEPA).
No one want to think about getting a divorce but failing to plan for any possible outcome can have a devastating impact on your business.
If your goal is a successful business transition and to get the most value from the sale of your business, your best bet is to consult with a Certified Exit Planning Advisor (CEPA). CEPAs who are also Certified Valuation Analysts (CVA) are the most qualified to help you achieve value acceleration.
John W. Davis, CPA, CEPA, CVA, CFP® is part of an elite group of advisors who are the most qualified to assist you and achieve your business transition goals. John has been working with Vermont business owners for more than 30 years with a special focus on developing strategic exit and transition plans.
Davis & Hodgdon Associates’ exit planning services are developed to address ALL of the essential components that result in a solid exit plan.
- Identify your exit readiness score and design a strategy to exit on YOUR own terms and conditions.
- Articulate and align your personal, business and financial goals. How? We will clarify your mission, strategic goals and key results.
- Perform a business valuation and design a strategy to maximize the value and sell-ability of your business.
- Financial planning services through our affiliated firm, Copper Leaf Financial, LLC to develop customized personal financial and “life after business” plans.
Davis & Hodgdon Associates CPAs has been assisting individuals and businesses throughout Vermont and New England for more than 30 years so please reach out to us in Williston (802-536-1831) or Rutland (802.775.7132) to talk or schedule a meeting and create your exit plan. You can also email us at [email protected].