Tips for business owners going through a divorce

Although research varies, it is estimated that between 40% and 50% of marriages end in divorce. A divorce can be emotional, painful — and expensive. And if you’re running a small business, it could have a significant impact on your cash flow.

If you own a small business, here are a few things to consider:

Get books in order

It’s important to make sure your books are as clean as possible. Many business owners mix too many of their personal and business expenses, usually due to sloppy bookkeeping.

During the discovery process, an opposing attorney can request just about anything related to your business, and this could put you at a disadvantage during negotiation.

“When you go through a divorce, you’re putting a microscope on your business and on your accounting habits, and if small discrepancies are found, they can blow up into bigger headaches,” said Linda Kerns, a family law attorney based in Philadelphia.

Consider an arbitrator

Both Kerns and John Zurzola, a divorce specialist and a partner at Weber Gallagher in Philadelphia, said arbitration — where you hire an independent attorney or judge — may be the best and most cost-effective route for a divorce negotiation. Kerns said that in arbitration, all matters are private and not subject to reporting.

“It would be beneficial to the business owner if a neutral arbitrator has knowledge in an industry, particularly if the business is technical,” Zurzola said. “Otherwise you’ll need to educate the court on how the business works, and this could lead to asset valuation problems.”

Cash flow effect

Consider the impact that your divorce will have on your future cash flow. Whereas your business might fluctuate depending on the season or your projects and customers, a divorce settlement — particularly when there’s alimony or child support — requires a consistent payment be made.

According to Kerns, one of the reasons cash flow becomes a challenge is that a business often gets valued during divorce proceedings, and the value of the business may contain noncash assets such as customer lists or a company’s reputation.

Think ahead

Regardless of the state of your marriage, it’s important to take steps in advance to protect your company’s assets — and even your business partners’ interests.

One of these steps is to have a buy-sell agreement with your partners. This is a legally binding document that stipulates in writing what happens when one partner dies, wants to be bought out or experiences other significant events that may impact a business.

Doing this in advance creates a defined road map and significantly reduces any confusion when a situation — like divorce — arises. Most buy-sell agreements require that a business has insurance to cover the costs of these types of events.