The impact of death and divorce on your business

In business, the personal has a way of infiltrating the professional. This couldn’t be more true when it comes to the impacts of divorce or death on your business. Both have the potential to irreversibly transform a business, which is why savvy business owners put measures in place to protect their business should either occur.

So, what are the risks of divorce or death on a business and what safeguards are available to you to protect your business?

What happens if you get divorced?

When both divorcing spouses are actively involved in the business, the common assumption is that both have a claim to its assets in a divorce. In some cases your spouse may have a claim of up to 50 percent of the business. When one spouse is less involved, or not involved at all, the business is still likely to be viewed as an asset of the marriage, subject to division on divorce.

One way to protect your business is to get a prenuptial agreement. This can be put in place before or during a marriage, however, if you started the business during the marriage things may become more complex and the agreement may not completely protect your business interests.

For divorcing spouses in business together, many won’t want to continue to work together following their divorce. Keeping the business running will therefore require one party to buy the other party out. This can be a complex and expensive process. If the marriage has enough assets to offset the value of the business then a more simple ‘swap’ of assets can be arranged, but this isn’t always possible. Some spouses may have a plan of attack upfront for the business in case of divorce, but most people don’t like to think divorce is likely.

What happens if you pass away?

While it isn’t surprising your death would significantly impact your business operations, many business owners are surprised by how.

Even if you have an idea of who will carry on your business should you die, if you don’t have the correct documentation and insurances in place, your business can be left extremely vulnerable and your family can be left out of pocket.

If you don’t have a Will, your business will be treated like any other asset and passed on to your closest family such as your spouse or children. If they don’t have the capacity or interest in running the business, it will become a major burden for them and your business is unlikely to survive.

If you are a part owner in a business and want to ensure your family can easily and quickly access your interest in the business when you die, there are other documents you will need to prepare. If you don’t it can be more challenging and time consuming for your family to access that money.

A Funded Business Succession Agreement deals with the succession of business ownership. The agreement is typically between the principals who have equity in the business and deals with the involuntary departure of a principal following events including death, total and permanent disability and trauma. These are considered insurable trigger events and will usually be wholly or largely funded by life insurance. Secondly, an insurance trust deed will fund payments to third parties such as your family.

While most of us don’t like to imagine that an unexpected death or divorce will happen to us, it pays to be prepared for the worst case scenario. With a little planning and preparation you can mitigate the risks for your business and gain peace of mind that your business and family will be protected.