'I'm Getting Divorced, and My Spouse Owns Part of My Company'

'I'm Getting Divorced, and My Spouse Owns Part of My Company'
Image credit: Illustration © Neil Webb
Magazine Contributor
3 min read

This story appears in the April 2014 issue of . Subscribe »

Q: I'm getting divorced, and my spouse owns part of my company. Now what?

A: Sorry to break it to you, but unless you went into business with well-defined operational roles or have a prenuptial agreement that clearly defines company ownership, you're likely facing a long and very expensive process of selling the organization and then distributing the payout as determined by the courts.

The nastier the divorce, the more disruptive and destructive its toxic effects on the business will be. Your employees will see a dark side of you and your spouse's personalities--and trust me, they'll never look at you or deal with you the same way again.

Your Silent Partner

Your spouse may not own any of your company on paper, but be aware that (with a few exceptions) he or she is owed half of the growth in value in a divorce--even if you started the company before you were married. Let's say you entered wedded bliss owning a $1 million company, grew it to a $10 million business, and now you're splitting up. Your spouse can reasonably expect to walk away with half of the $9 million of value created over the course of the marriage.

But I'm no therapist; I'm the Money Guy, so I'll stick to what I know. Assuming that you and your spouse don't have an operational agreement or prenup, the best you can hope for is a reasonably fast divorce. I qualify that because the downside of a quickie divorce is a settlement based on hurried and poorly reasoned decisions made more out of a fear of legal fees than out of anything else. (And that fear is justified. My basic ratio works out to $100,000 to $150,000 in divorce-related fees for a $2 million company. Can your company take that hit?)

There's nothing simple about this situation, except this point: If your spouse owns any part of the company, you'll need to buy him or her out or liquidate the business to finalize the divorce.

I wish you the best of luck, but remember, as a lawyer once told me, the best outcome in a situation like this is one in which both parties walk away disappointed.

Sharing a Bed With Your Partner

If you and your spouse are smart (and I'm sure you are), you know that it's best to be prepared for the worst. I strongly urge you to sit down with an attorney now and spell out the following specifics of your business partnership.

Signature authority. This grants the power to sign checks and enter into leases, contracts and financing arrangements without your spouse's signature. This protects one spouse from being held hostage by the other's leverage.

Personal guarantee. If your spouse is a minority stakeholder, he or she shouldn't be liable for company debts (especially if you're the one with signature authority). This prevents you from saddling the company with debt out of spite and making your spouse responsible for a share of it.

Separation trigger point. Spell out the exact terms that will define a separation in your marriage. (I know, it's not an easy conversation to have.) This will give you a clear date upon which the value of your company will be based. This prevents either party from dragging out the separation while slowly devaluing or destroying the company in anticipation of a divorce.

Buy/sell insurance. Protect your business with insurance that will cover the cost of buying out your spouse's share without requiring you to liquidate.

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