Editor’s Note: This article was originally posted in May 2020 on Forbes.com, and written by Kelly Frawley and Emily Pollock.
Happily married couples seldom think about what could happen in the event they one day decide to divorce. But a healthy dose of pragmatism is warranted, particularly if you own or co-own a business. The potential negative impacts of divorce on a business can be wide-ranging: Understanding them and putting some protections into place while your relationship is strong can be essential to the long-term success of your company.
Understanding Potential Impacts
Here are a few of the ways divorce can compromise your business:
1. Disrupting day-to-day operations. Divorce is notorious for thwarting “business as usual.” It vies for your attention, pulling you away from your management responsibilities. Suddenly you need to fit court appearances into your schedule, you may have to accommodate calls or correspondence with your matrimonial and family law attorney or business appraiser during the workday, and you need to comply with requests for documentation about your company— which can be time-consuming, distracting demands.
Your divorce can also distract your employees from the business. You’ll likely need help collecting documents for appraisal or for court and as the valuation of the business is conducted, employees may get pulled into the appraiser’s on-site visits; inventory review; analyses of tax returns, P&Ls and other documents; and even interviews about how the business is run and how expenses are managed.
2. Potential impact on your partners and/or employees. If your interest in the business is subject to division in divorce, how will you distribute a piece of this value to your spouse—for example, will you pay out your spouse with shares of stock? Think about the potential impact on your partners if you end up with a smaller stake in the company while your spouse becomes an uninvited partner, or, if your spouse decides to sell those shares, how that could negatively impact the company’s stock value. You should discuss all this with your attorney, including any restrictions to be placed on what your spouse may or may not do with their shares.
What if your spouse has held a pivotal role in the day-to-day workings of the business but decides to quit in light of the divorce? Now, others may have to pick up the slack. Or what if he or she decides to stay and the two of you have to figure out how to coexist without making day-to-day life uneasy for every other member of the team? This tension might cause your employees to feel uncomfortable and expose your business to legal issues, like employment legal issues relating to the relationship dynamics impact on the working environment.
3. Dissolving the business altogether. Don’t panic: This isn’t the usual impact of divorce on a business. However, if you and your spouse are equal partners, you may agree to dissolve the business. Or if your spouse is entitled to a big cash payout for his or her share of the value of your business and you don’t have the liquidity, you may be forced to sell or close the business in order to pay your spouse. Another scenario could include a culmination of negative events: disruptions to your operations and team resulting in poor communication with customers and business partners, bad press that damages your brand reputation and discourages people from doing business with you, etc.
Countering Negative Impacts Through Positive Action
The good news is that you can do things right now to prevent or mitigate these risks to your business. Most effective is to have a prenuptial (before your wedding) or postnuptial (during your marriage) agreement drawn up to detail the distribution of the business in the event of divorce. This can minimize any contention or ambiguity should you ever find yourselves across the negotiating table from each other, and give you (and your business partners) peace of mind today.
Here are a few of the matters you can clarify through a pre- or postnup:
- Whether the business you established prior to your marriage will not be subject to marital distribution upon divorce – even if you may be actively working for the business during the marriage
- Whether your spouse will share in the appreciation or depreciation of your pre-marital business during the marriage
- By which methodology the business would be valued at the time of divorce
- In the case of both spouses having an ownership interest during the marriage, would one spouse buy the other out in the case of divorce, would the business be sold and the proceeds distributed or would you maintain the business partnership in spite of the dissolution of the marital partnership?
As you go about the business of managing your company, these practices can also help you protect your business from the impact of divorce:
- Maintaining detailed records of all sources of business capital, and whether they were premarital or marital funds
- Keeping your business and personal expenses separate
- Making sure any cash transactions are well-documented
- Paying yourself a fair market salary so that a court will not be inclined to impute a larger income figure to you for purposes of determining support obligations
- Paying your spouse a fair market salary, if he or she works at your business, so that there is no question as to whether he or she should receive a larger distribution given the contribution of services
And finally, if divorce is imminent, keep these tips in mind for minimizing disruptions at your office:
- Keep work and divorce activities separate, including maintaining one master file on your computer or laptop for divorce-related items, using only your personal email for divorce correspondence, and limiting any discussion of your divorce with employees and peers
- Become a master scheduler, including designating a time slot each day for divorce calls and correspondence with your attorney or other contacts
- Minimize the burden on employees by providing those who help you collect documents with a single list of required materials
While divorce has the potential to damage your business, smart planning now can help you protect it.