Using a buy-sell agreement to protect your business

Owning a business is a good reason to have a prenuptial or postnuptial agreement. If your spouse is a co-owner or has invested any work into your enterprise, a court may rule that your spouse has an entitlement to some of your business value. Some entrepreneurs end up having to sell their business to generate proceeds for a spouse.

Your prenup or postnup can establish that your spouse will take a buyout in the event of divorce, leaving the business in your hands. To execute this provision, you will need to work out important issues in advance, such as how much your spouse should receive. Drafting a buy-sell document lets you describe how to purchase the ownership interest of anyone who owns a stake in your business.

Establishing the buyout amount

According to Nerdwallet, a buy-sell document should determine the value of the ownership stakes people have in your business. To figure out the share of your spouse, you must first establish a method for valuating your business. Your agreement may use a valuation formula or have a professional appraise your business when the time comes to implement the agreement.

With a valuation method in place, you can create a suitable formula to calculate the value that your spouse should receive. This should help you arrive at a final dollar amount.

Other provisions worth considering

A buy-sell agreement can cover a number of issues important to your business. Depending on the circumstances, you may want to address some or all of the following:

  • Events that will trigger the buyout
  • Establishing a funding mechanism to buy out your spouse
  • Allowing for a payment plan instead of a lump sum payment
  • Forbidding certain individuals from receiving ownership shares

Depending on the size and complexity of your business, your buy-sell agreement may be simple in nature or it will have to address a number of financial matters in detail. Regardless of your situation, having a buy-sell agreement may be the crucial document that saves your business in a divorce.