Protecting Your Business When Marriage Ends: Key Tips for Entrepreneurs

For business owners divorce introduces an additional layer of complexity. Not only are your personal finances at stake, but your business—your livelihood—could be divided as well. Whether you started your business before the marriage or built it together, the way it is valued and divided can have long-lasting financial implications. As an experienced divorce attorney serving Franklin, Tennessee, I’ve worked with many entrepreneurs navigating this delicate process. In this article, I’ll outline critical strategies to help protect your business during divorce and secure your financial future.

1. Is Your Business Considered Marital Property?
In Tennessee, divorce follows the principle of equitable distribution. This means that marital property is divided in a fair, but not necessarily equal, manner. One of the first questions to address is whether your business is classified as marital property or separate property.
• Marital Property includes assets acquired during the marriage, and this could include a business if it was founded or substantially grew during the marriage.
• Separate Property consists of assets owned before the marriage or acquired as gifts or inheritances. However, if a business was started before marriage but grew significantly due to marital efforts, its increased value could be considered marital property.
Active vs. Passive Appreciation
Tennessee courts differentiate between active appreciation, where the business’s growth is due to the direct efforts of either spouse, and passive appreciation, which results from market conditions. Only active appreciation is typically subject to division in a divorce.
Pro Tip: Keep thorough financial records, especially if your business was started before the marriage. Document all investments, market influences, and marital contributions to determine which portions of the business might be exempt from division.

2. Accurate Business Valuation is Crucial
The accurate valuation of your business is essential during a divorce. Tennessee courts often rely on fair market valuation to assess the worth of a business, taking into account tangible assets, future income projections, and intellectual property. The valuation process can become contentious, especially if one spouse undervalues the business to protect their interests.
Factors That Influence Business Valuation
• Business Structure: Whether your business is a sole proprietorship, partnership, or corporation can affect its valuation and division.
• Revenue and Profitability: Consistent earnings or expected future growth significantly influence a company’s value.
• Market Conditions: Economic trends and industry-specific factors play a role in determining fair market value.
Pro Tip: Work with a forensic accountant or financial expert to get an unbiased and accurate valuation. This ensures that both you and your spouse are working from a fair estimate, and it provides a solid foundation for negotiations.

3. Pre-Nuptial and Post-Nuptial Agreements: The Best Protection
For business owners, one of the most effective ways to protect your company during a divorce is through a pre-nuptial or post-nuptial agreement. These agreements allow you to specify which assets are to remain separate in the event of a divorce, including your business.
• Pre-Nuptial Agreement: Signed before the marriage, this agreement outlines each spouse’s assets and clearly defines what will remain separate property.
• Post-Nuptial Agreement: Created after the marriage, this agreement can similarly protect a business, especially if the company has grown significantly during the marriage.
If you didn’t have a pre-nup or post-nup, it’s not too late. Tennessee law allows for post-nuptial agreements, which can help mitigate risk, even mid-marriage.
Pro Tip: If your business grows substantially during the marriage, consider updating or creating a post-nuptial agreement to avoid potential disputes over the business if a divorce occurs later.

4. Retaining Business Ownership Through Negotiation
In many cases, business owners want to retain full ownership of their company post-divorce. To achieve this, you might negotiate a settlement where your spouse receives other assets of equal value, such as real estate, vehicles, or retirement funds, in exchange for keeping the business intact.
Buyouts as a Solution
A buyout is a common option where one spouse agrees to buy out the other’s share of the business. This allows you to retain full control while compensating your spouse fairly.
Pro Tip: When negotiating a buyout, explore options for a structured payment plan. Paying in installments can protect your business’s liquidity and prevent financial strain.

5. Managing Debt and Cash Flow
It’s essential to assess the debt your business may hold. Tennessee courts divide marital debt along with assets, which means any loans or liabilities your business incurred during the marriage could be divided.
To avoid putting your company at risk, ensure that the division of debt is handled equitably. You’ll also want to ensure that the business’s cash flow remains stable throughout the divorce process to maintain operations.
Pro Tip: Work with your legal team to structure the settlement in a way that doesn’t jeopardize your business’s financial health. An expert financial advisor can help you manage debt and ensure continued growth post-divorce.

6. Post-Divorce Financial Planning for Business Owners
Once the divorce is finalized, rebuilding your financial foundation becomes the next priority. As a business owner, it’s essential to revisit your estate plan and make adjustments to your business structure and succession plans, especially if your spouse was involved in the business.
Updating your will, beneficiaries, and powers of attorney are critical steps in ensuring your business’s long-term survival and your financial security.
Pro Tip: Consult with both a financial planner and an estate attorney to revise your business continuity plans, ensuring that any changes resulting from the divorce are reflected in your future financial strategies.

Final Thoughts: Securing Your Business and Your Future
Divorce can be a complex process, but with the right legal and financial strategies, you can protect your business and secure your financial future. If you’re facing divorce in Tennessee and own a business, don’t leave your future to chance. Contact me to discuss how I can help you protect your business interests and guide you through every step of the divorce process.

Contact:
Michele McGill
Family Law & Civil Litigation
615-389-6453