Ensuring Business Survival When Divorce Hits

Launching a business has a lot in common with getting married. Both require a leap of faith, grounded in deep self reflection coupled with open-eyed due diligence.

And neither marriage nor business has a guarantee of success.

When the business is solid but the marriage is crumbling, how can you make sure the business will emerge relatively unscathed from the process?

There are many factors at play, so each couple will have to forge their own path. Here are some tips.

Enter Marriage and Business with an Exit Strategy

When launching a business or diving into marriage, an exit strategy is a good idea. While bringing up a prenuptial agreement may feel awkward, the reality is about half of marriages end in divorce, so having a thoughtful, measured conversation about the possibility of divorce is an essential step in the marriage journey. If one party already owns a business, that business needs to be discussed in detail—both how the couple will deal with it in marriage, and in potential divorce. If you feel resistant to this conversation, remember that the fall-out won’t just affect you and your spouse: it will impact employees, partners and clients.

Prenuptial Agreements Smooth the Transition

It’s important that both parties have independent legal representation when constructing a prenup. Otherwise, there’s a risk of the agreement being dismissed in court. A judge can also dismiss the agreement if she believes a party hasn’t been honest and transparent when making it.

A parallel activity is the establishment of a buy/sell agreement, which establishes guidelines governing the departure of any co-owner from the business.

Having had that conversation and put both legal and informal agreements in place will make it much easier to manage emotions should you decide to split up.

Post-Divorce Options: One Spouse Keeps the Business

This is the most common option. It’s likely to take place when one spouse has a significantly greater interest and history with the business. Typically, the invested spouse buys out the other spouse’s interest. A professional appraisal establishes the value. Generally this method is tax-efficient: it’s considered a transfer of property incident to divorce, and therefore usually not taxable.

Other strategies include a settlement note to be paid off over time, or the company can buy back the departing spouse’s shares.

Post-Divorce Options: Both Spouses Keep the Business

When divorce is especially amicable, and both parties are equally committed to the business, they may continue to be partners in business if not in married life. Obviously it’s not for everyone, but it can be done. When successful, it is an enriching exploration of a new phase of relationship.

Post-Divorce Options: Both Spouses Sell the Business

The couple can sell the enterprise and split the proceeds. However, this may take time and undesirably lengthen the proceedings.

Professional Help to Navigate Divorce

It’s essential that couples enlist empathetic, experienced and qualified help as they navigate their transition. Find a divorce lawyer who is also versed in business issues. Make sure to get accurate, conclusive tax advice about the ramifications of transferring the business.

Consider exploring collaborative divorce with an experienced attorney. This is a form of alternative dispute resolution (ADR), which means that the lawyers agree that if a settlement is not reached, they will retreat from the process and not pursue litigation. This is a huge motivator for attorneys to seek a peaceful, constructive resolution.

Use a mediation specialist to discuss and pursue a mutually agreeable resolution, greatly enhancing the prospect of a peaceful parting of ways.

The bottom line: advance planning will help keep emotions in check and contribute to a more amicable divorce as well as a smoother business transition.

This entry was posted in Selling a Business on by .
Bob Griesgraber

About Bob Griesgraber

Co-founder-President-Opportunities in Business. Established in 1981. Graduate-University of Minnesota, B. A. Graduate University of Missouri, M. S. Graduate University of Pennsylvania-Wharton School, Strategic Management. Member: International Business Brokers Association, Institute of Business Appraisers, Institute of Certified Business Counselors,Society of Business Analysts. Licensed-State of Minnesota

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