Navigating business ownership and divorce

Running a business can be time consuming, stressful and take a toll on the owner, their family, and too often, marriages. In fact, divorces are more common for business owners than in general, ranging between 43 and 48%^†.

Of particular concern to small business owners may be the dramatic increase in what some call ‘gray divorce,’ meaning couples that divorce at 50 or older. Gray divorces have roughly doubled since the 1990s^‡. By the time they’ve reached their 50s and beyond, couples are likely to have accumulated significantly more assets than they had when they were just starting out. They have much more to lose in a divorce, including possibly the business that they’ve worked so hard to build.

Divorce isn’t a pleasant topic, but an important one to take into account when looking to the future. Discussing and agreeing on reasonable and fair terms and conditions during amicable times may lessen the tumult of divorce. Fortunately, there are steps for asset protection to take even before marriage to prepare for such an eventuality.

Before “I do”

Lay out terms before marriage

A good first step is the often maligned and misunderstood prenuptial agreement–not a practice as rare as one may think, and certainly not limited to the rich and famous. A 2022 Harris Poll actually found 15% of those responding to a survey have signed prenuptial agreements designed for asset protection^§.

Often referred to as a ‘prenup,’ the topic may suggest one foresees doom, but like the need for life insurance, wills and trusts, preparing for any and all eventualities is a sign of wisdom–especially when significant assets may come into play. If both parties have relatively similar levels of wealth, the topic may be easier to discuss than if the wealth gap is substantial.

A prenuptial agreement does not exclude one person from another’s assets. It simply allows both parties to agree on how the assets, including investments and retirement funds, property, the business(es) and expected inheritances should be distributed if necessary.

A prenuptial agreement can also protect one partner from another’s debt, which could be a less confrontational angle to introduce the topic. It’s important to note that each state has unique rules and that a legal professional can draft an effective agreement.

When working together

If only one spouse owns the business but both partners work in the business, there’s a chance that courts may view the ownership of the business from an equitable standpoint. And the more involved each person is in the business, the more ‘ownership’ they’ll each feel.

You could protect your business in the case of divorce by forming an LLC, trust, or corporation even if you’re the sole owner. This allows you to separate yourself as an individual from the business.

After the honeymoon

If you’ve tied the knot and now think a contract with your spouse could help each of you, a postnuptial can be created. Again, if the topic can be introduced and discussed as a tool to help each spouse, perhaps the discussion can be civil.

There’s little difference between a pre- and postnuptial agreement, though the assets involved could change as time passes. The benefits of both types of contracts can be valuable not just in the event of a divorce, but also if written appropriately in the event of a sudden death.

Start with understanding concepts around the division of assets

In order to know what assets could be at risk in a divorce, consider the difference between ‘separate property’ and ‘marital property.’ Property or other assets acquired prior to the marriage, such as a home, retirement account, or inheritance, generally are considered separate property, while anything acquired afterward is generally considered marital property.

The same is true for a business. However, appreciating value of certain assets occurring after marriage may be generally considered marital property, owned by both you and your spouse. Or let's say you started a business prior to the wedding but then your spouse became involved with it and you comingled business funds with personal funds. In this case, a court could look upon the business as marital property.

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), judges split marital assets down the middle^¶. But the remaining states operate under equitable distribution rules^#. In those states, judges have more discretion to consider other factors, including fairness, a spouse’s ability to support themselves independently, and the duration of the marriage.

Assets in a trust are usually considered separate property and not subject to division unless the trust includes marital property or used to pay for marital assets. Because of the complexities of asset division and varying state laws, discussing this with your financial, legal and tax professionals will be necessary.

Business valuation in divorce

Regular business valuations done every year or two can make the inevitable negotiations that happen during divorce proceedings easier. If you need to get a business valuation, there are several different approaches to consider, including asset, market-based, and income approaches.

The asset approach considers the assets minus the liabilities and sets a value based on the expected proceeds from a liquidation. The market-based approach takes into account the value of other comparable businesses, while the income approach calculates value based on earnings.

The best method to use depends on the type of business. An accountant or other business valuation professional can determine which makes the most sense, so we suggest you work with your tax advisors to get an analysis completed.

Imagine your ideal outcome

What a couple chooses to do with their business may depend on the state of the relationship at the time they decide to divorce. If both parties have a financial interest in the business and their divorce is amicable, they may want to maintain joint ownership where both remain involved. However, they may prefer to part ways and not continue as co-owners.

If this is the case, one option may be to sell the business and split the proceeds. While that option may seem the simplest it often may not be the most desirable. You may be forced to sell the business at a suboptimal time when its value is not the highest, or you may want to keep the business as an ongoing concern. If that’s the case, it may be best to buy out your spouse, by offering them cash or some combination of assets that would be equal in value to their share of the businesses, such as a vacation home or securities in an investment account.

Secure your future

Conflicts inevitably arise in a divorce given the competing interests of each side. That’s why having a team of trusted advisors who work well together is so important. Advisors who aren’t closely aligned or who don’t have a full picture of your situation may unintentionally end up working at cross-purposes. But a trusted advisor with a team of specialists who understand your needs and circumstances and are aligned around your goals will help keep you on the path to a secure financial future.

Getting the advice you may need

No matter what the circumstances, going through a divorce is hard. We can’t make it a completely painless process, but we can help mitigate the damage to your finances, focus on asset protection, and provide guidance on steps you can take to protect your business. Connect with your Huntington Private Bank advisor to outline a plan that can help alleviate your concerns. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.