No one wants to plan for the worst-case scenario, and when you're married you certainly don't want to be worried about anything as terrible as divorce. After all, you're in love and you want your marriage to last.
While that makes sense, approximately half of all marriages end in divorce. When people consider the consequences of divorce, they often think about the effects on the children and the loss of a partner, with the impact on their finances a secondary concern. The truth is, though, a divorce can have a drastic impact on your economic situation, and this is complicated significantly for business owners.
In addition to the legal fees associated with a divorce, you have to think about splitting your assets (including the value of your business), how your finances will look after you no longer have a spouse, managing your cash flow, whether you need or will pay child support or spousal support, and how to get your finances back on track.
Divorce and financial planning
Once you know the divorce is happening and there's no way around it, begin tracking your household's income and expenses. This will help determine your budget after the divorce and will assist the courts in determining how any assets or liabilities should be split, and whether spousal support or child support will be awarded.
Things to include in your tracking are household bills, clothing, home maintenance, transportation costs, child care and food. If you have past banking and credit card statements, use these to estimate your household income and expenses from the past. Make sure you also include one-time expenses such as vacations or large household purchases.
Get as much documentation as you can to support your claims. Include banking statements, investment statements, loan documentation, credit card statements, pay stubs, income tax returns, and a list of any assets and debts that were brought into the marriage or accrued since you were married. That will help the judge as they determine how to split the assets and liabilities from the marriage.
Divorce can sometimes cause people to do crazy things trying to protect their finances or business (selling off assets, moving assets offshore, taking on unfavourable debt). Don’t make drastic decisions that you’ll regret later, or aren’t in line with your values.
Get advice from a professional
Going through a divorce is already emotional enough. Your lawyer will advise you on the legal dealings, but there are rules regarding your finances as well. A financial expert will help you navigate the monetary and investment aspects of your divorce and advise you on what you can and cannot do until your assets are split and the divorce is finalized.
You may be tempted to make big financial decisions, but these aren't usually advisable and could affect any awards the judge gives regarding support for or from your spouse. A financial expert will also help you plan your finances for after your divorce, when you may need to re-examine your budget, cash flow or your investments.
If you were not involved in planning or managing finances when you were married, speaking to a professional is even more important as you will have to make many decisions about your financial future and may need assistance understanding how to manage your money effectively.
One major part of splitting assets is determining the fair market value (and the FMV equity) in the major assets owned by the couple, which are most likely the home and the business.
Too often small businesses are shut down, forced into bankruptcy, or sold because of divorce.
When a business owner is in the position where they need to part ways with half their net worth, it's very likely they will need to restructure their business in order to come up with cash to settle the divorce. Your ideal approach will depend on whether you and your former partner own shares, are active in the business and want to continue with the business, but here are some ways to generate some liquidity in your business:
- Take out debt to buy out the partner
- Bring on a partner or investors to raise equity to buy out your partner
- Sell off assets or parts of the business
- Sell the whole business
- Forego all other family assets to keep your business alive
- Find a way to continue running your business with your ex-partner as a shareholder, and determine a fair way to compensate them (usually in the form of dividends)
Your friends, family and colleagues will offer well-intentioned, but often uninformed financial advice during this time. They're trying to help, but they aren't in your exact situation and don't have a full understanding of the legalities surrounding your circumstances. Resist the temptation to listen to them without also speaking with a professional financial planner about what you're going through.
Divorce is stressful enough without having to navigate the financial aspects of ending a marriage. Having the right tax support during this time can ensure you limit disruptions to your business and have an optimal tax outcome.
Get in touch
Please get in touch with us if you have any questions.
Have you seen our webinar on Financial Planning Tips & Tools for Business Owners? Chartered Professional Accountants Matt Peterson, Curtis Gabinet and Dil Sran of True North Accounting offer financial planning advice, tools and resources for business owners who want to set themselves up for success.
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