17 Oct How Your Divorce Can Sink Your Business
It was a fantastic fit: Marissa’s knowledge of the local real estate market blended perfectly with Garrett’s expansive network of contractors and suppliers.
Everything looked great on the surface. But all was not well on the home front for Garrett.
Divorce on the Horizon
For the last few months, Garrett had been having a really tough time at home with his wife, Brenda. Brenda wanted a divorce. Their relationship continued to sour after she served Garrett with divorce papers.
To make matters worse, Brenda hired a Debra, an aggressive divorce lawyer. Debra was known in the local lawyer community as “Doberman Debra” for her tenacity in divorce cases. She had an abrasive “take-no-prisoners” style.
Things got ugly quickly.
All of a sudden Garrett found himself in the midst of a nasty divorce battle.
Brenda’s divorce attorney wasted no time in going for the jugular:
Garrett’s ownership interest in the business.
Brenda’s attorney argued that even though Brenda did not actually work in Garrett’s company, she indirectly helped him build it and should get a piece of it. For years, Brenda homeschooled her and Garrett’s children by herself. She’s kept the household running and taken care of all the cleaning and laundry and other chores. All while Garrett worked 14-hour days building his business.
Garrett objected to Brenda’s arguments, but it was no use. The judge sided with Brenda. The judge gave Brenda 25% of Garrett and Marissa’s business.
Brenda was now Garrett and Marissa’s new business partner.
Tensions (and Legal Bills) Flare
This was a nightmare scenario for Marissa and Garrett’s company.
For one, Brenda knew absolutely nothing about real estate. Secondly, Marissa had built the business with Garrett. As far as Marissa was concerned, Brenda had absolutely nothing to do with the business’s creation or growth. She resented Garrett and Brenda for putting the business in this situation.
Tensions flared as Brenda asserted her newly acquired authority in the business. She demanded frequent updates. She questioned the business’s finances and spending decisions.
“This can’t go on like this. We need her out ASAP,” thought Marissa and Garrett.
Marissa and Garrett hired a lawyer to help them buy Brenda out of the company.
The buy-out process was contentious, difficult and expensive. But after over $250k in legal fees and other costs, Marissa and Garrett worked out a settlement to buy out Brenda’s interest in the business for $1.3M.
Brenda was finally out of the company.
Although the business survived, the stress and financial burden of the whole ordeal continued to weigh on Marissa, Garrett, and the company for years.
The Divorce Threat to Your Business
In many states, when getting a divorce, the property a couple owned during marriage gets divided and distributed between the divorcing couple. Many business owners do not realize that courts take a very broad view of “property.” Property includes not only your cash, mutual funds, real property, and retirement accounts, it also includes . . .
Your ownership in your business.
That means you could be at risk of losing your business if you or your business partners get divorced.
When emotions run high in divorce proceedings, having an unintended business partner like Brenda can lead to disputes over money, control and the future of the company.
What can you do to avoid the divorce threat?
Enter the buy-sell agreement.
Defusing the Divorce Threat to Your Business
The way to deal with divorce is to have a plan for it before it happens.
But you need more than that. A plan by itself is not good enough. You need that plan to be legally respected and enforced to keep the Doberman Debras of the world from wreaking havoc on your company.
You do this with a buy-sell agreement. And not just any buy-sell agreement. Your agreement must have specific language in it that addresses what the company will do to protect itself if one of its business partners gets divorced.
The Most Important Part of the Planning: The Process
But, and this is critical to understand, the agreement itself is not the most important part of this planning. Yes, the agreement is the end result and it’s important but it’s how you get there.
It’s the critical conversations you have with your business partners about what you want to happen if one of you were to get divorced.
How you determine what your shares in your company are worth.
Who you want to allow to be in your company and who you want to keep out.
That’s the most important part of this planning: the process of talking about and deciding what you and your partners truly value and want.
That’s where your business lawyer comes in.
A lawyer with experience in divorce planning for buy-sell agreements is an essential piece in making sure your plan is thorough and that it actually will work when you need it.
Are You at Risk? Find Out with a Business Vision Assessment
Life’s twists and turns, like divorce of a partner, can test even the strongest businesses.
The best way to get your business protected from divorce and other risks is to schedule a Business Vision Assessment with us. This Assessment is a customized evaluation of your biggest risks and areas of exposure for your company. By going through the Assessment, you’ll gain greater clarity than you’ve ever had before about how your business is exposed to legal and liability risks like divorce and what you can do to protect all you’ve worked to build.
Schedule an appointment with us today. Ask for a Business Vision Assessment to safeguard your future.