Protecting the Family Business When Owners Get Divorced

Originally published: 10.01.13 by Lisë Stewart


6 Steps to help ensure your business survives a marriage dissolution

 

I walked into the office of the CEO of a small family business one bright spring morning to find him sitting in the dark, the shades pulled and his head in his hands. Dan, a long-term client, asked me to shut the door and silently motioned for me to take a seat beside his desk. He then said, “Sally and I have decided to split. We’ve been trying to make this marriage work for years and I guess we’re just too tired to do it anymore.”

I would like to say this type of conversation is rare, or that I was surprised or even unprepared for it. The reality is, I come across these situations often. Not only am I deeply sad for the family, but I am also very worried about the business. The break-up of a marriage in a family-owned business can spell disaster for the business, the employees and even the community. Dan and Sally were a major employer in their small rural town; if their business went down, it would impact a lot of people. Today, almost 50% of marriages end in divorce. A tiny fraction

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of those couples are able to end their relationships amicably, but more commonly, the friction and animosity spill over into all aspects of the owners’ lives, bringing despair and confusion to anyone who comes in contact with the parting pair.

While divorce has become more commonplace, it does not need to lead to the disintegration of the business — particularly if the couple is willing to consider a few different options and can still speak to each other long enough to discuss the future.

Although I am not an attorney, I am a business consultant, coach and mediator who has worked with companies for over 30 years. Here are some of my recommendations for those business owners who may be facing one of the toughest times of their lives, but want to preserve their business and the jobs they have created.

1. Deal with emotional issues before emotions become the issue.
I am a fan of using prenuptial or post-nuptial agreements as a way to work through ‘what-if’ scenarios while emotions are still contained and logic still rules. This is a legal agreement that clearly spells out what will happen to your assets in case of a divorce or death. It is important to have a conversation about what both of you would like to see happen if the worst scenario occurs and to make sure you each have separate legal representation. It is not unusual for a prenuptial agreement to be disallowed if one of the parties did not have legal representation when it was developed. Your respective attorneys will represent your best interests and develop the final agreement. It is also important that you are honest, clear and transparent. After all, this is the beginning of a relationship you hope will last a lifetime; if a judge believes you have not been fully honest with your disclosures, your agreement will be useless. An agreement allows you and your partner to decide what to do with your assets while you are both in a positive state of mind, instead of leaving it up to a court to decide when your emotional states are compromised.

In addition, I recommend that family business owners ask their children, who might inherit the ownership of the business someday, to use these agreements as they move into their relationships. I have seen too many successful family businesses falter, and even fail, when a divorce in the second or later generation rocks the foundation. How would you like to find yourself having to raise the cash to pay out a former son-in-law who has divorced your daughter?  Your best option is to work with an experienced lawyer who practices family or matrimonial law to assist you in developing the best type of agreement to meet your needs.

Another way to protect your assets in case of a divorce is by establishing a clear Operating Agreement and/or Buy/Sell Agreement when first starting the business. (See Operating Agreements and Buy/Sell Agreements below.)

The most important thing to remember is that just having a conversation about what you want to have happen if things don’t work out as planned can help couples have a more reasonable discussion later.

2. Discuss the future of the business before the situation becomes too fractious.
Dan and Sally were still civil and open to suggestions, so our first step was to open up a conversation about what they really wanted to do with the business. We knew that once their respective divorce attorneys got involved, they might be swayed by arguments to “get as much from the settlement as possible,” which often means selling the business or closing it down and selling off the assets. Both Dan and Sally wanted to find a way to keep the business going so jobs would be saved. They recognized that, if this was really important, they might both have to compromise in other areas. We were able to make a list of the options that were most agreeable to both parties before the situation became too tense.

3.  Find attorneys who share your concerns about your business.
It was key for Dan and Sally to be clear with their attorneys about their shared desire to preserve the business and protect their employees from the stress of what was going on in their personal lives. Both Sally and Dan agreed to find and work with attorneys who shared this concern. They sought to work with professionals who were committed to developing solutions that meant the business wouldn’t have to close.

4. Consider working with attorneys who practice Collaborative Divorce.
This is a form of Alternative Dispute Resolution (ADR) in which all parties, including the attorneys, meet together in a non-confrontational manner to develop options and enter into interest-based negotiation. What is unique about this form of ADR is that the attorneys and clients develop a Participation Agreement in which the attorneys agree that, if a settlement is not reached, they will withdraw from the process and will not move to litigation. This means the attorneys are committed to actively managing the emotions, conflict and family/relationship issues in a constructive manner.

Communication and respect are vital, and this approach often results in a process where all parties leave feeling validated and more satisfied with the outcome. From a business perspective, the owners can express their wishes for the future of the business and their attorneys will work with them to make this a reality. There are Collaborative Divorce specialists throughout the country and you can find one in your area by searching collaborativedivorce.net, or by simply typing “collaborative divorce” into your search engine.

5. Consider mediation.
Mediation is another form of Alternative Dispute Resolution. I prefer working with those attorneys or mediation specialists who practice facilitative or transformative mediation. In this case, the mediation facilitator is focused on involving both parties in the conversation so they can listen to each other’s perspectives and develop a resolution. The mediator creates an environment for truly understanding the situation and exploring options. Being treated respectfully, feeling heard and having an opportunity to think through the situation and a range of alternatives can be a very powerful experience. I have seen situations in which the mediation actually brought about reconciliation between the two parties — once both had the opportunity to air their issues in a calm and respectful manner and truly ‘hear’ each other for the first time. Even if reconciliation is not the outcome, a mediated resolution often increases the chances of a win/win outcome and creates greater potential for healing in the future.

6. Explore multiple options.
All too often, only one option is explored, leaving many ideas on the table. Dan and Sally had both worked very hard in the business over the years. They had each sacrificed and they could both say they had sunk money into building the company. However, the business was still small (45 employees) and was still carrying a substantial amount of debt from recent equipment purchases. At first, Dan feared he’d have to sell the business to pay off the debt, get a job and start making alimony payments to Sally. They had no children, but with his engineering degree he was much more employable than Sally, who had no formal training and would need to re-train to enter the workforce. However, with help, the couple reached an agreement in which Dan was able to keep the business AND the debt in his name. Sally got the house, the land and much of the couple’s personal property, and the company remained intact. It wasn’t a perfect solution for either of them, but they agreed, in the end, that it accomplished what they wanted to achieve.

Planning, foresight and the ability to generate options are key to helping a family business survive while the family re-adjusts and finds a new path forward. Sometimes the business is the lasting legacy of a family that changes in composition but remains committed to the greater good that their business can achieve.

 

Operating Agreements and Buy/Sell Agreements

 

An Operating Agreement and/or Buy/Sell Agreement is another way to protect your assets in case of a divorce. These are legal contracts that clearly articulate what will happen to company assets and ownership should one of the owners become disengaged, disabled or deceased. If you own a company, it is imperative that you work with an experienced corporate attorney to develop the legal documents that protect your interests and minimize risk. While these can be complex documents, they will usually cover such issues as:

  • Community Property — Who owns the equipment, the name, the debt, etc? For example, do non-active spouses share in the ownership and responsibility? Does a laptop that belongs to a working owner also belong to her husband who does not work in the company?
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  • Limitations and Liabilities — How much money can members spend without a vote or consent of the other members? Can a family member/owner take out a loan against the company? What happens if a family member goes bankrupt? What happens if a family member tries to defame the family name or the business reputation? Can a family member open up a competing business?
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  • Dispute Resolution — What would happen if there were ever a major dispute or divorce? Will the owners consider mediation and then arbitration as an alternative to litigation?
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  • Insurance and Deferred Compensation — What type of insurance do you plan to carry on key individuals, and who owns the policies? What type of deferred compensation are you setting up for current owners/managers who may want to exit from the company someday? What type of pension or benefits are you willing to pay to retiring/exiting members?
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  • Withdrawing from the Business — What do you want to do if someone wants to leave? What happens to the ownership? Do the remaining owners want first right of refusal? Can you sell to non-family members, etc.? How will the company be valued? 


These are just some of the issues an Operating Agreement or a Buy/Sell agreement might address. Again, it is important to involve the right professionals early in the process to answer questions and provide guidance about what to include, protecting your company and personal assets in the future.

Lisë Stewart is founder and director of Galliard Group, a training and consulting firm specializing in family-owned and closely-held businesses. She is a nationally recognized author and speaker who draws on her 25+ years of experience to share practical advice for ensuring sustainability of family businesses.

Contact Lisë at lstewart@galliardgroup.com

 


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