Since the beginning of COVID, a few business owners have asked me what measures they should take to divorce-proof their business. I think the more appropriate question is how to divorce-ready your business. Similar to the assets of a marriage, a company’s assets are considered mutually owned within a marriage. The complexity of a business can be far more challenging to place a value upon it. Still, similar to the assets of a marriage, it’s crucial to understand its value before the relationship begins. The other objective is to get your spouse to agree to a few agreed-upon measures before the marriage starts to unravel. Failing to do the following may result in your ex-spouse becoming an unexpected partner within the business or fighting to prevent your business from being sold to raise cash to satisfy a divorce settlement.
Create a Buy-Sell Arrangement within a Shareholder Agreement
Whether you’re the sole stakeholder or have several shareholders within the company, ensure you address what happens should one of the shareholders go through a divorce. Similar to the effects if one of the shareholders within your company dies, a buy-sell arrangement will allow existing shareholders to buy out half your stake in the business. This step prevents your spouse from becoming an unwanted shareholder within the business. It also ensures the business management does not become compromised in the event of a shareholders’ divorce.
2. Sign a Prenuptial Agreement
Many business owners are getting spouses to sign a prenuptial agreement to identify the business before starting the relationship. This measure won’t necessarily prevent your spouse from going after the appreciation in the business. Still, it will help to establish what the situation was before the commencement of the relationship.
3. Purchase a Corporately-Owned Permanent Life Insurance Policy
If your company is doing well, purchasing a permanent life policy is a great way to place excess capital within your corporation, pay less tax, have your surplus cash within the policy grow on a tax-free basis, and leverage the policy’s cash value to help fund a divorce buyout. There is no such thing as Divorce insurance in Canada but consider this the closest available product.
4. Keep Your Business Finances Separate from your Personal Finances
Do not cross this line. As soon as one party can prove that finances between personal and the business were connected, it makes it exceedingly more difficult to prove that these assets should be treated distinct and separate. This means no personal loans between the entities, credit cards are separate from one another, and no property investments are purchased for the exclusive benefit of the family (i.e. cottages, rental properties, vehicles). If in doubt, request the opinion of an accounting professional.
5. Pay Yourself What You’re Worth
Many entrepreneurs tend to take lower salaries or deferred salaries until the company has the financial legs to stand independently. They may opt to bonus or dividend themselves money on occasion, but many will opt to leave excess salary in the company in retained earnings. Some lawyers may argue that in doing so, it was depriving the family of what was rightfully theirs. Ensure that you take a salary/bonus comparable to what your talents might fetch on the open marketplace.
6. Sacrifice Other Assets
If you want to retain ownership of your business, you may want to sacrifice other assets instead of holding onto control of your business. You may want to give your spouse complete right to the matrimonial home, recreational properties, or investments.
7. Donate to a Charity
We’ve all seen some divorces get downright nasty. Spouses would rather give away their money than have to give it to their ex-spouse. Although I don’t advocate to this, you can’t stop someone from doing something if they’ve got absolute conviction about something. Perhaps there’s a middle ground where some good can come from a bad situation. As opposed to giving it away or paying it in taxes, entertain writing a cheque to a charity that you’d like to see benefit from it. The funds will go to a great cause, the business will receive a great big tax credit, the owner can build upon their corporate brand and leave a lasting legacy.
8. Get Help from a Financial Advisor
You would also be wise to talk with a financial advisor. If you decide to liquidate assets (life insurance, registered and non-registered investments, recreational properties), you will likely be subject to tax. Engaging a financial advisor can tell you the most tax-efficient way to liquidate these assets and attract less tax. Remember that your spouse is likely more interested in what they get to keep in their pocket than the paper value.
To divorce-ready or divorce-proof your business, much consideration should be centred around timing. The awkward and challenging conversations that you may need to have early on in your relationship may save you potentially thousands in settlement costs down the road.
Through the bankruptcy of his first business, a strong balance sheet means nothing unless you can get the money out of your business and into your hands personally, tax efficiently, and creditor protected. Chris helps and coaches business owners to avoid a similar fate as he suffered in his first business.
Through several clever strategies, he illustrates how these little-known vehicles can get money out of your business efficiently, build your corporate brand and create a legacy through charitable means to help make a meaningful difference in the lives of others.
Also, he has seen the impact that mental health can have upon success within your business and your life and how the two are on a constant collision course. When Chris became aware that Entrepreneurs struggled with their mental health at more than twice the rate of average adults, he realized he wasn’t alone and made it his ambition to understand why and do something to help. His business, The Finish Line Group, aims to help support the entrepreneur’s financial, philanthropic, and emotional needs.
Chris’ Why Statement remains, “To openly communicate the lessons learned from my past so that others will thrive in their lives, minimize their setbacks and leave a positive and lasting legacy.”