It’s a sad but true statistic: 50% of U.S. marriages end up in divorce court, a number that has held steady over the past decade in spite of bad economic times, according to the CDC’s National Vital Statistics System. Although the numbers represent a decline in overall divorce rates from the high of the late 20th century, it is rising in some demographics–specifically, among baby boomers.
While the personal impact of divorce can be devastating, splitting up a marriage can also disrupt a spouse’s business—especially the typical independent insurance agency, which tends to be privately held and frequently intertwined with the family.
In the case of a divorce, a privately held business can represent a major portion of the marital estate and become subject to division in the settlement. Business owners who don’t plan for this eventuality the same way they would any other personal catastrophe could seriously damage their agencies as the result of a divorce settlement.
Luckily, there are things you can do to protect your business—not just from the ill effects of a divorce, but from any other personal catastrophe, says Tim Cunningham, managing director of OPTIS Partners, a Chicago-based specialty investment banking and consulting firm focusing on insurance distribution.
Here are some steps you can take to keep your agency–or a client’s business–running in the event of a divorce, death, disability or other life event:
Pay a professional to regularly—and fairly—value your business. This is a basic first step in any sort of long-term agency planning, even if you’re a single-owner agency, Cunningham stresses. Regular periodic valuation of your business by an industry-specific professional firm has the collateral benefit of establishing the value in case of a divorce. It is also essential in transactions with shareholders, to provide collateral for a lender, and in estate planning. And although there are dozens of amateur “formulas” floating around, such as multiples of revenue or commission, don’t rely on these home-remedy estimates to value your agency. “A fair valuation by a qualified professional is good business planning and it may help bulletproof you in a divorce,” Cunningham says. “Value the firm fairly and regularly, even if you’re a sole shareholder.”
If a divorce is inevitable and you’re dividing up a marital estate, your business’s value will become an issue. Both spouses will likely have their own valuation. “Then it becomes a case of dueling experts,” Cunningham says. “Many judges in divorces have a very poor grasp of business issues. If you’ve had a valuation done periodiucally and your method has been consistent, your lawyer can argue to the court that this is a fair value.”
Draw up a pre- or post-nuptial agreement. Although not a lot of people do pre-nups before tying the knot, they should, says Cunningham. Among other things, a good pre-nup will clearly specify that a spouse’s business is completely separate from the marital property in case of divorce. And it’s never too late: For business planning purposes, spouses can have a lawyer draw up a post-nuptial agreement.
Use shareholder or similar agreements to manage claims on the business by a spouse if there is a divorce. This approach makes sense if the agency has two or more equity owners—again, because the issue of ownership is germane not only to divorce, but also clarifies matters in the event of a partner’s death, disability or retirement, Cunningham says. If there are multiple shareholders, each should have a separate employment agreement, including non-compete language and details about agency value and how it is to be valuesd and treated in the event of a divorce—another reason to have the agency professionally valued regularly.
Run your business like a business. The family agency isn’t personal property, so “treat it like a business,” Cunningham says. Make it clear that the business is your employer by paying yourself and the other owners a market salary based on their contributions and keeping business and personal finances strictly separate.