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Closely Held Business Succession Planning and Divorce

Would Divorce Destroy Your Business?

 An unexpected divorce can destroy your Business Succession Plan. As a business owner you are focused on all the operational issues of running your closely held business.  The last thing on your mind is what happens to my closely held business if I get a divorce?

If you are like most business owners, you do not plan to exit your business until retirement.  Because you plan to exit at retirement, you have not done any Business Succession Planning. The consequences of failing to do Business Succesion Planning can destroy your closely held business.

Dealing with a Divorce with No Business Succession Planning

If you do get divorced, your closely held business would probably be the most valuable asset you own.  Even more devastating in a divorce, your business is probably your most illiquid asset. Have you ever thought about the possibility that you may not have the cash to buy your spouse’s interest in the business?

Russ Loses His Business to His Wife Kathy in the Divorce

Russ and Kathy run a closely held family glass supply and installation business.  Russ and Kathy have never done any Business Succession Planning. Running the business requires 60 hours a week, and sometimes involves heated discussions and  challenging business actions.

Russ and Kathy like many closely held business owners bring their business problems home.  The stress of the business, along with other issues lead Kathy to file for an unexpected divorce.  What happens to the closely held glass supple business in the divorce?

Kathy Gets 100% of the Business in the Divorce

In this particular case, Kathy got the family glass supply business in the divorce.  This raises questions such as how will Kathy get the cash to provide equal value to Russ? Can Kathy run the business profitably?  Will the business be destroyed by the divorce?

Proper business succession and estate planning through the use of trusts and life insurance trusts can protect the business and its assets. Other business succession planning strategies can not only provide solutions to the divorce problem, but can also provide solutions to liquidity issues.  Planning ahead can also protect your personal assets and family wealth. If proper estate and business succession planning can resolve most of these problems, why don’t closely held business owners like Russ and Kathy do proper planning?

Why Baby Boomer Owners of Closely Held Businesses Fail to Have a Business Succession Plan for Retirement and for the Possibility of Divorce

 The reasons that baby boomer  closely held business owners don’t plan include:

  • Procrastination;
  • Being too busy in running their business;
  • Not knowing where to start;
  • Not wanting to deal with their own retirement or mortality;
  • Having unrealistic expectations for other family members;
  • A lack of time;
  • Not seeing and understanding the urgency;
  • Not understanding the devastation to their business from not planning; and
  • Failing to realize the true value of their business.

Unfortunately, for business owners like Russ and Kathy who fail to plan, they are leaving money on the table.  In the particular situation of divorce, you may simply not have enough cash to fund the marital settlement and keep your business operating. If Russ and Kathy had consulted with an Oregon Business Succession Planning Attorney when they started their business they would have been ready to handle the effect of a divorce on their business.

How to Protect Your Closely Held Business from Divorce Through Business Succession Planning

 It seems out of place to plan for divorce to protect your closely held business when you are getting married.  However, someday you will exit your closely held or family business either voluntarily or involuntarily.  Events such as retirement, major health issues, death, bankruptcy or divorce can result in either business succession or termination.  There are steps you can take as part of your Business Succession Planning to be ready for unexpected divorce.

Steps You Can Take To as Part of Your Business Succession Planning to Protect Yourself from Letting a Divorce Destroy Your Business

 Before Marriage Sign a Prenuptial Agreement

This is the closely held business equivalent of a Buy-Sell Agreement.  This agreement provides in advance for contingencies that might affect the change in relationship and the continuity of your business.  This agreement will limit sale of the business outside the family.  It will also ensure that there is a willing buyer in case of a triggering event such as divorce.

After Marriage Sign a Postnuptial Agreement

This is the same as a Prenuptial Agreement, but would be used when you start a business after marriage or you failed to execute a Prenuptial prior to marriage.

Buy-Sell Agreement

If your Closely Held Business is a partnership, limited liability company or corporation you should have a Buy-Sell Agreement.  What to include is beyond the scope of this article, but it is recommended to include provisions requiring all married owners to have a prenuptial waiving their spouse’s interest, deny spouse voting rights and prohibit transfer of ownership outside the current ownership group.  Of course, if the spouse is active in the business the terms of the Buy-Sell Agreement will need to be modified.

Keep Your Personal Finances Separate

Do not comingle your personal finances with your closely held business.  If you bring the business to your marriage as your separate property, investing marital money in the business can trigger your spouse’s right to a share of the business.

Have a Liquidity Plan to Buy Out Your Spouse

The end result of divorce can be a Court Order requiring the sale of the business.  If you want to continue your business you will need a plan to buy out your spouse.  This will require either draining cash from the business or obtaining a business loan to buy your spouse’s interest over time.

If You Want to Protect Your Closely Held Business from the Impact of Divorce Be Proactive in Your Business Succession Planning

 You don’t want to think about divorce.  The reality is nearly half of all marriages end in divorce.  If you built your business without your spouse’s contribution, you want to keep it.  A divorce may well end up with a judge ruling your business is marital property, but you must be proactive and take steps now to protect your business.

Use the Right Tools and Strategies to Protect Your Business

While nothing is certain in the world of business and divorce, there are strategies to protect your interest.  An Oregon Business Succession and Estate Planning Attorney can help you understand Business Succession Planning strategies, including Divorce strategies, and how they will help you achieve the outcome your desired goal. Contact a Business Succession and Estate Planning attorney by contacting Pike Professional Legal Services in Salem, Beaverton or the Willamette Valley, Oregon at 503.888.0952 to set an initial FREE CONSULTATION.

For more information on Estate Planning and Business Succession Planning Russ Pike has written a book.  You can purchase a copy of Russ’ book, Wills, Trusts and Estate Planning-Your Final Act of Love by clicking here.