4 Tips for Protecting Your Company From a Divorce
Dianne Hively was a partner and CFO at a financial services firm more than a decade ago when she got divorced. She and her then-husband didn't have a prenuptial agreement. Though the company was losing money and had very little value on paper, her ex was awarded a percentage--starting at 50 percent and declining to zero over five years--of anything Hively got out of it. (In the end, that didn't add up to much.)
Today, Hively is happily remarried. She's also the president of Hobson Advisors. She wishes that, in her earlier marriage, she had taken the kind of financial advice she now gives clients for a living. Some of her tips:
1. Don't make it personal. Asking your spouse for a covenant to protect your property if the marriage implodes is awkward. But when your property is a business, "it's not just about you," says Hively. Investors, employees, suppliers, customers, and extended family may also rely on the stability of your company. Explaining this can reassure a loved one that the paperwork doesn't show a lack of trust.
2. Get it in writing. Before you wed, sign a prenuptial agreement to declare your business nonmarital property: a separately held asset that won't be divided should you divorce. If you're already married, consult a family attorney about a postnuptial agreement. If a company has two or more owners, consider additional legal tools. These include buy-sell agreements, which dictate in advance the terms for transfer of ownership, and shareholder agreements, which can set limits on the ownership rights of a founder's ex-spouse.
3. Pay yourself. You may be tempted to take sweat equity instead of a tangible paycheck in the early stages of a company. Avoid it if possible. Why? Because it jeopardizes your ownership claim. If you aren't drawing reasonable compensation for your work, "your spouse can come back later and say, 'You used marital assets to support that business when you should have been taking in income,' " Hively explains.
4. Don't mix the money. "You have to be very careful to avoid commingling nonmarital assets with marital assets," Hively says. For example, if you inherit $500,000, that money belongs to you. But if you use it to buy a house with your husband, it becomes a marital asset, potentially entitling him to a portion if you divorce.
Hively urges couples to keep clear records of marital and nonmarital assets, even if they sit down together to hash out the distinction only once every year or two.
JESSICA BRUDER | Columnist
Jessica Bruder teaches at the Columbia University Graduate School of Journalism and is the author of Burning Book: A Visual History of Burning Man. In previous lives, she was a senior editor at Fortune Small Business magazine and wrote Start, a New York Times blog on new ventures. You can find more of her work at Jessicabruder.com