The pandemic has complicated divorces. The number of official splits declined in 2020, likely for practical reasons. By now we’re seeing a sharp increase, and these divorces are among couples with conflict simmering much longer than usual. Entrepreneurs (and their legal representation) beware: these types of divorces can be disastrous for a small business.
Bill and Melinda Gates’s divorce is a high-profile example of the trend that’s just taking off. In fact, their divorce highlights two trends: Divorces that may have been put on hold during—or perhaps hastened by—the pandemic and the phenomenon occurring disproportionately among couples later in life. As the divorce rate in the U.S. has declined overall in recent decades, it’s more than doubled for those aged 50 and older.
These trends are concerning, but for married business owners, they should be downright terrifying. When couples own a business together, the negative impacts of divorce can ripple through the business like an earthquake. The business often must be dissolved because the spouse who wants “out” is entitled to a large cash payment of their share, and the only way to pay up is to liquidate. Even if the spouse is not part of the business, an entrepreneur without adequate asset protection could see their business topple due to the “half of everything” rule of divorce, especially in Texas, a community property state.
Prenuptials and smart business structuring can prevent the worst from happening to a divorcing business owner. But for many, hindsight is 20/20. All business owners—including those in happy marriages—should still consider the financial hygiene practice of exit planning. They should start by addressing questions including:
- How much of the business do I own versus other partners?
- Is my spouse a partner in the business with their own shares?
- How does my spouse contribute to the business?
- Did they make career sacrifices to support my business endeavors?
- Does the business pre-date the marriage?
- What methodology will be used to value the business during an exit or an event like a divorce?
- How will partners in the business handle these changes—for example, is there a buy-out agreement?
Let’s talk about the importance of forensic accounting within this context. You may think of forensic accounting as most valuable to the non-business-owner to uncover hidden money in the business that can be included in a divorce settlement. Yes, that’s a great use of a forensic accountant. But it’s also vital for the business owner to do some investigating on their own. A forensic accountant can:
- Unwind business capital assets that pre-date the marriage.
- Separate business and personal assets.
- Determine a fair market salary so that it’s not assumed you have a more significant personal income than you do.
- Do the same for a spouse who works in the business so that their compensation is fairly established.
- Prepare for property division and valuations.
- Serve as an expert witness in court.
With divorce among older couples skyrocketing, it’s more important than ever to get accounting professionals involved. A business owner who falls into that category often has high net-worth assets precariously intertwined with their spouse. We all hope for the best in our partnerships, including marriage. But it’s also wise to plan for the worst while hoping for the best. Feel free to contact us with questions.
