How to Keep Divorce From Ruining the Family Business

by Sheryl Nance-Nash on June 26, 2013
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Divorce often brings out the worst in people, which can be a huge problem when a family business is involved. Protecting yourself and your company while ending your marriage requires a level head at a highly emotional time.

Here’s how to be keep a divorce from ruining your livelihood.

Determine the Company’s Fate

Perhaps the biggest challenge is deciding — and possibly negotiating — what will happen to the business after the breakup.

“Will the couple continue to co-own the business, will it be sold, or will one party buy out the other’s interest?” asks Jennifer Yelen, a partner at law firm Posternak Blankstein & Lund.

“If the parties will co-own the business, it may be necessary to very specifically delineate, in writing, each party’s respective duties and responsibilities.”

Assess the Business’s Value

Even if the business is not jointly owned, its value is critical. As part of the divorce, you’ll need to figure out what share of the business belongs to each spouse, says Jason Kolinsky, a certified financial planner and founder of Kolinsky Wealth Management.

“It’s difficult to keep the emotion out of the conversation when talking with married couples. We always advise our clients to have shareholder agreements and buy-sell agreements in place [in advance],” Kolinsky says. “These legal documents can help when divorce becomes imminent.”

To estimate how much a business is worth, hire a professional who can objectively put a price on the company, such as an appraiser, a CPA, or a business broker. As John Collar, Jr., a partner at law firm Boyd Collar Nolen & Tuggle, points out: “Each spouse’s view of the value of the business is no longer in alignment with the other’s. The spouse retaining the business wants a lower value, applying discounts and tax affecting the business, while the spouse being bought out seeks fair market value or fair value without the business being discounted or tax-affected.”

Charles Weinrich, a private financial adviser for SunTrust Investment Services, recommends that, as you gather an army of experts to help get you through the divorce, you enter into a confidentiality agreement with all parties involved. This will protect sensitive information and ensure that trade secrets will not be disseminated.

Weigh the Options (and Troubleshoot)

In some situations, the business may be a major marital asset and splitting it may not be viable. “The goal is to avoid having a spouse [who isn’t already involved in the company] interfering with the family business operations,” explains Kevin Worthley, a certified divorce financial analyst for Equitable Divorce Solutions. “Or, if the non-business spouse actually becomes a part-owner, how will the business be affected by this person’s ‘meddling’ in the business or suddenly becoming involved as a part-owner?”

If there is little or no liquidity or borrowing capacity to pay out part of the company to the uninvolved spouse, the business may have to go through a downsizing or consolidation — or cease operations altogether — because of the divorce, Worthley notes.

There may be complications if the spouse who’s running the family business is hiding or minimizing income through it. “Maybe his or her blood relatives will conspire with the business spouse to make him or her earn less [on paper] or reduce their ownership interests in light of the pending divorce,” Worthley warns.

Minimize the Financial Fallout

Divorce is tough, and you shouldn’t make it any tougher. Here are three tactics that can lessen the financial blow to your business in the event of a breakup.

  • Sign a prenup. As unromantic as it may seem, “Plan for the possibility of a divorce before the situation arises,” advises Benjamin Sullivan, a certified financial planner for Palisades Hudson Financial Group. If you started and built the business prior to your marriage, a prenuptial agreement can specifically state how the business will be treated upon divorce. Kolinsky adds that you still may have to make some adjustments. “A sticky situation exists for small-business owners: Even when one spouse may have put in most of the effort to build the business, the support received from the other spouse has a definite value.”
  • Mediate. Rather than going straight to the lawyers and litigation, try to reach a divorce settlement first. “Tens of thousands of dollars might go to waste in petty arguments through litigation that could be saved by the couple trying to mediate first,” Worthley says. “Remember that the two entities you don’t want to get too much of your combined money are governments — the IRS and the state — and attorneys. Avoid prolonged litigation and avoid making big tax mistakes.” Dividing the business 50-50 may make sense in the end.
  • Stay focused. Yes, it’s a highly charged time, but keep an open mind about what’s best for the business. Perhaps it would be prudent to have an outside manager or receiver to come in and make day-to-day decisions while you’re handling personal matters. “It is often an overlooked assumption that the person operating in the good times should continue to manage the business during the bad times,” says Daniel Gold, managing partner at law firm Tredway Lumsdaine & Doyle. “That creates problems if you have a spouse who is unhappy about the divorce or begins exercising their newfound ‘freedom’ with employees of the opposite gender.”

If you take the proper steps, the end of a marriage doesn’t have to mean the end of a business, too.

Sheryl Nance-Nash is a business writer for Intuit and is passionate about solving small business problems.

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