Divorce-proof your business

So you have a business with your spouse and business is going well, but marital bliss is fleeting.  Have you thought about the fact that post-dissolution; your business may have to be sold to raise cash?  Anything you can do to divorce-proof your business?  Here are some thoughts:

1. Keep good records

Be sure to maintain records and keep business and personal assets separate.  

2. Pay yourself a salary (maybe)

A salary can be a double-edged sword.  Pay yourself a lower salary than your spouse and his attorney may argue he is entitled to a larger share of the business post-marriage.  Pay yourself a higher salary, and you may provide great evidence for his lawyer to come after you for spousal support.  The best bet is to have the same salary level as your spouse.

3. Regularly value your business (conservatively)

The value of someone’s business changes drastically depending on whom is asking.  Applying for an SBA loan?  Then you’ll claim you have great cash flow and low current ratio.  During divorce proceedings, the respondent will always claim that the business is hemorrhaging cash and has a negative net worth.  Annually valuating your business in a conservative manner may help provide a fairer divorce settlement.  If you receive very aggressive valuations from a generous analyst and your spouse sues you for divorce the next day, you may be kicking yourself all the way to the courthouse.  If you have your business valuated, make sure it is conservative and accurate.

4. Realize that your business is probably a partnership

Unless you have another business association (LLC, Corporation, etc.) your business with your spouse is probably a partnership.  Even if you never signed a partnership agreement, you have a partnership.  If you never signed an agreement, surprise! The state of California has written a partnership agreement for you.  It’s something very much like the Uniform Partnership Act.  Under the UPA, any partner can force dissolution of the partnership.  So, if you have a partnership and you haven’t agreed to other terms, your spouse can force the destruction and sale of assets of the business.  If you sign a buy/sell agreement, you can agree in advance to buy the other spouse’s share for a set (or floating) amount and prevent the destruction of your business.

5. Buy/Sell agreement

Any buy/sell agreement should take fiduciary duties (discussed below) into account, but a buy/sell agreement can be a useful planning tool.  Who gets to keep operating the business after dissolution?  Is one party ousted?  Does the type of business require that one spouse stay in the business to ensure its viability?  Is the ousted party the one who files for dissolution?  Is it the one who commits adultery?  Is the departing spouse paid in installments?  Will the dissolution force the sale of the business?  What about goodwill? 

One popular buy/sell provision requires that one partner divide the assets of the partnership.  The other partner is assigned the task of dividing up the debts.  The partner who divided the assets gets to choose one of the piles of debt.  The partner who divided the debts gets to choose one of the piles of assets.  This gives a strong incentive for each to divide the piles equally.

6. Be ready to buy him out

So you want to keep the business, but where are you going to come up with the funds to buy out your ex-spouse?  Talk to your friends about investing in the business in order to shore up the funds.  Talk to a business consultant about leveraging business loans to shore up the cash.

7. Don’t let it burn to the ground

You may want to burn the marriage and sift through the ashes, but don’t let the split do the same to the business.  If money is starting to disappear, someone has acquired a substance abuse problem, or one spouse is grossly mismanaging the business, be prepared to dissolve the business as soon as possible before they squander anything its worth.  Even if that means dissolving the business, that may be better than losing everything.

8. Special options with abuse, harassment, or violence

If your spouse has been abusive, you may be able to get a domestic violence protective order that also restrains him from the home or your business.  In the alternative you may pursue a civil harassment order or a workplace violence order.  Note: the standard for a civil harassment order is much lower.  In addition, you don’t need to be married to seek protection under the Domestic Violence Protection Act (commencing at Family Code § 6200).

Also, under Family Code § 6324, as a part of a domestic violence protective order, a court can order the “temporary use, possession, and control of real or personal property of the parties and the payment of any liens or encumbrances coming due during the period the order is in effect.”  Not only might you be able to keep him away from the business, the judge may order he pay the mortgage and rent in the meantime.

9. Act in good faith

Marriage creates a fiduciary relationship just like a business partnership.  California Family Code § 721 states, “This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.”  Firing your spouse, concealing assets, and signing really one-sided contracts are probably going to back-fire in the long run.

10. Talk to an attorney

You want your husband out of the business, but how do you avoid liability for his future actions?  What type of buyout provision works best for you and won’t be thrown out of court?  If I pay myself a salary, will that protect me or reduce my prospective spousal support award?  Running a business and ending a marriage is stressful enough, get some accurate answers to your concerns in advance to make sure you are setting yourself up for a smooth transition.