Before you formed your business partnership, did you vet your
partners’ marriages along with their bank statements? You may not
consider it until divorce proceedings are underway, but your partners’
spouses likely own a part of your company, whether you want them to or
not.
In my day job as a financial strategist specializing in
complicated (and often highly contentious) divorces, I rarely see a case
where the day-to-day operations, valuation and ownership structure of a
business is not affected in some way by a breakup. If your partner’s
soon-to-be ex receives a part of the business in the divorce settlement,
you’ll gain a new, unwelcome partner who now has a voice in how your
business operates and, by extension, can impact your own net worth.
Michael
Lees, a business attorney and partner at Solomon Ward Seidenwurm &
Smith in San Diego, recommends including a contingency for divorce in
your company’s setup. “Start with a well-drafted partnership, ownership
or shareholder agreement that requires a partner’s spouse to sell his or
her awarded interest back to the company (or to its co-owners) in the
event of divorce,” he says. “This buy-sell provision should contain a
comprehensive list of terms and conditions, including the method by
which shares will be valued, the transaction timeline and the source of
funds to be used for the purchase, such as cash on hand, an existing
line of credit and/or a loan.”
To ensure that the “right to
purchase” can be upheld in family court, it is worthwhile—and often
essential—to have all non-partner spouses consent in writing to all
aspects of the agreement long before any marital dispute
arises, according to Lees. In the event a buy-back is not possible, this
agreement can limit an ex’s voting rights and/or management
participation.
Even with such arrangements in place, John Ovrom,
CEO of Coronado, Calif.-based Exit Consulting Group, regularly sees
divorces play havoc on operations. “If one partner has to step away from
the day-to-day operations to tend to his or her divorce, the balance is
thrown off,” he says. “Resources are spread thin, resentment increases
very quickly, and the partnership begins to look more like a sole
proprietorship. The impact on cash flow can be dramatic and
devastating.”
Ovrom’s
advice is to plan for the worst. Divorce, illness, disability or the
death of a loved one will affect your partner’s ability to contribute to
the business. “You need to set up a legally binding plan that addresses
how to handle these challenges,” he says. “One that answers some basic
questions, such as how long one partner can step away from the company
before his or her compensation drops. Who will assume his or her daily
duties? If a loan or pay advance is needed to cover skyrocketing legal
bills, what are reasonable terms?”
These are tough queries, but
it’s better to ask them now than in the middle of a messy divorce.
Handled correctly, every partner, including you, should come away with a
greater sense of trust in one another to do the right thing to preserve
the company—even when someone’s personal life is going down the drain.
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