When the Vow Breaks The Effect of Divorce on a Family Business
By Edward D. Tarlow
F
amily businesses face many challenges as they strive to survive and thrive. Among the most difficult to overcome is one that is unique to a closely held business: divorce. A divorce can be financially and emotionally devastating to a family business. We have all overheard a business owner referring to his or her company as being “like a ED TARLOW child.” The custody battle for the business can be expensive, contentious and, without proper planning in advance, potentially fatal. This is particularly true if a company has been jointly owned and its growth has been a labor of love for both spouses. Even when one spouse is a non-owner who does not work actively in the business, the company is frequently a couple’s largest asset; thus 12
its value becomes a point of contention in divorce proceedings. For a family business to survive a divorce, the possibility of divorce must be anticipated and planned for well in advance. While nobody wants to imagine a time when a marriage is dissolved, it is inexcusable to ignore the possibility. The incorporation documents of every closely held business should include an agreement about ownership rights and stakeholder value in the event of an owner’s divorce. Succession planning documents should also include provisions for the dissolution of the marriage of one or more of the next generation of owners. Disposition of the business can be addressed in a premarital or post-marital agreement, carefully structured and negotiated to provide certainty in the event of a divorce. Every possible permutation of what might occur should be considered and addressed, such as spouses who are
joint owners, a non-owning spouse who acquires a share in the business as marital property, and stakeholders who are not party to the divorce but whose ownership is affected, among others. A variety of options exist to resolve the issues of ownership and control of a closely held business upon the divorce of one or more owners. It is generally in the best interests of both parties to the divorce if a business remains a viable operation, although this is not always possible. Buyout of a Spouse’s Share One solution to settle control of a business in a divorce is for one spouse to buy the other spouse’s ownership interest, or for the spouse who is an owner to compensate the non-owning spouse for the value of the owner spouse’s interest in the business. A typical hurdle is finding a valuation method and pinpointing a number on which both parties can agree. The services