When Married Business Partners Divorce

The dissolution of a business partnership can easily become rancorous. The dissolution of a marriage can also become rancorous. Put them together and you find problems that are unique for both partnership and marital dissolution. I do not know how  common the situation is but I suspect it is more common than we think. Eighty to ninety percent of all businesses in the USA are family owned and more than a few of these involve husband/wife teams running the business. When the spouses decide to divorce the economic issues of the divorce are complicated by the issues of the business. Generally, the problems arise because the business is the livelihood of both partners. This presents some difficult choices. Assuming that this is not a wealthy couple, in which either or both has sufficient wealth to retire, both will continue to need the income generated by the business. There is a limited universe of choice.

One possibility is for both of them to remain in the business, divorced from the marriage while continuing as business partners. It works occasionally but requires two mature personalities each able to separate family issues from business issues. Notwithstanding the divorce, they must retain enough respect and goodwill to cooperate so that customers and employees are not stressed by the relationship between the partners. But for most the stresses of the divorce and the aftermath of divorce are too much to maintain the partnership for long. I have seen couples manage quite well until one or the other finds a new significant other. It is too much to ask most people to accept their spousal successor as a presence in the business. Unless the spouse with the new relationship keeps the new love interest out of the business altogether trouble is afoot. Nor is it easy for the new boyfriend or girlfriend to accept that his/her new lover will leave every day to spend the day with a former spouse.

It is also difficult for the couple to keep the issues that broke up the marriage from affecting their business relationship. Differences in business philosophy, differences in risk tolerance, acceptance of children into the business and differ attitudes toward money can all, in time, cause overwhelming stress. So staying in business together for many length of time is not realistic for most divorcing business partners.

A second scenario that sometimes occurs is that one spouse keeps the business and pays alimony to the other who leaves the business. But it is not usually po0ssible to both pay alimony and to buy out the leaving partner at the same time. The reason is that there is not enough cash flow to do both. If a business is worth one million dollars as a going concern and one spouse buys out the other, the remaining spouse will either borrow the money from a lender; have the leaving spouse hold a note on which payments are made or some combination of both. But the monthly payment of a ten-year note at 5 % would be in excess of $5,000 per month. To add alimony to this might exceed the cash flow possibility of the business. The problem may be abated if the marriage has other assets that can be offset against the value of the business. So if the couple also owns real estate with equity of $750,000, the one who leaves the business gets the real estate plus $125,000 for the balance of his/her interest in the business and the deal becomes possible. But even here there is a caveat.

It is common in the sale of a business for the person bought out to sign a non-competition clause that prevents that person from being employed in a competing business for a specified number of years within a specified geographical area. It is a reasonable requirement that the bought out party not begin to compete for the very business she is selling. But in a divorce that may be more difficult. Assuming the price of the partnership interest is not large enough to generate enough investment income to live on, that bought out spouse must work, in the absence of alimony. But because of the family location it is not feasible for that person to work or start another business outside of the geographical limits. So the non-compete covenant becomes a tricky issue.

Another possibility that works in some situations is to split the business. Suppose the business is a retail operation with four stores. One of the spouses may keep two stores and the other keeps two stores with appropriate financial adjustments and each continues doing what he/she knows best. This assumes that their division of labor has not been one in which either spouse lacks the knowledge to run a business solo. But although this may work for a retail operation it might not work for an advertising agency in which the few key clients have a personal loyalty to one of the spouses and would be unwilling to be “assigned” to the other.

The final possibility is to sell the business altogether and split the proceeds. This is a viable alternative only if the business has so much value that each of the ex partners would not have to worry much about other income. In that case neither has to be concerned with covenants not to compete and each goes his/her own way. I would think that this arises only in businesses that have been operating successfully for a long time with a couple that was anticipating retirement in the near future.

Each of these possibilities adds numerous complications and delay to the divorce. Not infrequently both a business-oriented lawyer and a divorce lawyer are retained for each partner. Having four lawyers involved is more than twice as complicated as having two lawyers and can be very expensive. Whenever the couple can use one or more mediators to facilitate the deal they save both money and time. And if the couple even hopes to continue in the business as partners an adversary divorce with two quarrelling lawyers will certainly kill that possibility. In that case they almost must use mediators.

Sam Margulies, Ph.D., J.D., is one of the most experienced mediators in the United States. Since 1980, he has mediated hundreds of civil disputes and approximately four thousand divorces including many complex multi-million dollar matters.  His books can be found in bookstores and at Amazon .com.  Contact him today to discuss your case.

sam@sammargulies.com
or (336) 669-3141

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