The dissolution of a marriage is not only emotionally taxing, but the impact on a couple’s economic situation can be particularly severe, especially when they own a business.
As a divorce attorney for high-net-worth individuals, I’ve witnessed firsthand how divorce proceedings can devastate a couple’s business ventures. In one of my former cases, a couple who owned a successful nutritional food company chose to unnecessarily prolong their divorce proceedings. That not only made the process painful for both sides, but their business lost key employees, their sales plunged, and they lost out on a generous offer from outsiders to purchase their company for nine figures.
To prevent such scenarios, it’s crucial for divorce attorneys and financial planners to work together to safeguard their clients’ business assets during a divorce. Here are six ways they can do this.
Make sure the divorcing couple is prioritizing business as usual. Running a business during a divorce can be extremely difficult, given the time and emotions involved. Financial advisors and lawyers should work together to make sure the operations of their divorcing clients’ business are disrupted as little as possible. This means taking steps to minimize painful and costly legal maneuvers, such as subpoenas; depositions; and testimonials that rope in partners, key employees and customers.
Have both spouses sign confidentiality agreements. In almost every divorce that involves a couple in business together, I insist that both sides sign confidentiality agreements to safeguard the proprietary nature of the company documents. Delicate facts and figures come to light during divorces—like a business’s assets, liabilities, income and expenses. There’s no reason to share those sensitive documents with anyone other than relevant experts. It’s ultimately not in either party’s favor if sensitive paperwork ends up in the hands of competitors or the press or on social media. Without confidentiality agreements in place, a scorned spouse is more likely to make things public, which can lead to the business taking a significant financial hit.
Be transparent. I make it a rule to share as much information with the opposing side as necessary to stem concerns that important data is being withheld. If financial advisors and lawyers for the business owner are cagey and reluctant to share bank paperwork, profit and loss statements, and other important documents, that will ring alarm bells on the other side. It’s better to have an open-door policy and remove the fear that something untoward might be going on.
Understand precedent. There’s a common misconception that in a divorce, the non-titled spouse—that is, the spouse who doesn’t own the business—will inherit half of it. That’s simply not true. Most of the time, existing businesses have shareholder or operating agreements that prohibit a non-titled spouse from gaining control, particularly after a shareholder dies or gets divorced. And even if there aren’t such agreements, courts are still reluctant to direct one owner to become a partner with another owner’s ex-spouse. Business owners should enter the divorce proceedings free from these misconceptions and misplaced anxieties.
Be realistic. Even with the precedent outlined above, it’s still important to be realistic. Non-titled spouses will receive some value from their ex’s business, if not part ownership. This value is called the “distributed award,” and while it may be painful to part with, it is the practical, smart course of action and the only way to keep a business active and healthy during divorce proceedings. In most cases, a business owner should buy out their spouse early and for a fair price, typically between 10% and 35%. The key factor in determining a precise percentage is the other spouse’s direct and indirect contributions to the business. These might mean the spouse’s tangible contributions, like hours worked, or indirect contributions like the time they spent caring for children while the husband or wife more engaged in the business traveled and worked long hours.
Collaborate. Last, but certainly not least, financial advisors and divorce attorneys should work together closely throughout the entirety of the divorce proceedings. By talking early and often, they can paint a realistic picture of a business’s valuation, allowing for a swift and fair settlement to put the business back on track to succeed.
Divorce proceedings almost always complicate a spouse’s business. But those impacts don’t have to be deep and negative. By using the strategies I’ve listed here, advisors and attorneys can ensure that the end of their client’s personal relationship doesn’t also mean the end of their professional ventures.
Gus Dimopoulos, Esq., is managing partner of Dimopoulos Bruggemann P.C., a matrimonial and family law firm based in Westchester County, N.Y., that specializes in high-net-worth divorces.