Entrepreneurs are an odd breed. I should know- I am one and I am also married to one. They often come with a unique drive to succeed, big visions, and even bigger ideas. Being the spouse to an entrepreneur can mean years of sitting shotgun on a wild ride. It can also mean a lot of angst, worry, and fear when the topic of divorce arises for both the entrepreneur and his/her spouse. Often the entrepreneur’s biggest concern is what will happen to the business through the divorce process and the fear that their current spouse will be awarded half of their business. The most common fears for the entrepreneur’s spouse are that because of the divorce, they will be cut out from the business and the lifestyle that the business affords them both or that they are not going to be able to get a fair outcome. The intersection of business and divorce is a unique consideration that many family law attorneys don’t understand and appreciate. As an entrepreneur and a family law attorney who also acts as corporate counsel for a family business, I have had distinctive experiences that assist me when working with divorces involving small businesses.
When working with an entrepreneur, one of the first things that I will share to put the entrepreneur’s fears at bay is that I have worked on many cases involving small businesses, and that I have never had a case wherein a court awarded a spouse who was not involved in the family’s business ownership in the business. Nor have I ever worked on a matter where the court ordered the business to be sold on the open market nor was a successful business shut down because of a divorce.
Typically, when a small business is involved in a divorce, our first step is to assess the business value. Most often, that entails obtaining a business valuation by an outside, independent professional who is trained and experienced in providing business valuations. Business valuations are used not just in divorce cases but also for business exit strategy planning, business sales, and acquisitions. There are three widely used approaches to valuing a business. These three approaches can result in large disparities in the resulting valuation. As such, it is imperative that any attorney who is working on a divorce involving a business valuation understands the differences between the three.
When we are working on a collaborative matter, either collaborative divorce or mediation, prior to engaging a professional to conduct the business valuation, we will want to afford both parties the opportunity to meet with the business valuator to ask questions and to ensure that they both understand the business valuator’s process and method in determining their business valuation. Ideally, with the guidance of the valuator, both parties to a divorce can agree to the valuation method that makes the most sense for their business and the amount of any discounts that should be used in same. Discounts are assessed to a value when the owner has a business partner or partners (lack of control) and/or if the businesses were to be sold on the open market, it may be challenging to find a buyer (lack of marketability). The discounts used for a valuation are somewhat standard but there are ranges that are acceptable.
Once we have a business valuation, we want to discuss payment terms. Some businesses can finance the owner by paying his/her spouse their marital share of the business. If such a business is at issue, we will typically create documents that spell out the terms of the payments and secure the payments with the business ownership. The payments are then made on a reoccurring basis, often with profits from the business. If that is not an option, the business owner looks at other assets to help offset the value of the business in the final outcome of the divorce or seeks a loan to finance the buyout of the nonowner’s marital interest.
We have, on rare occasions, worked with couples who agree that they want to continue to both own their family business following the divorce. In these rare cases, we encourage the couple and any other business owners to work together to create a Family Business Constitution. A Family Business Constitution is essentially a document that creates the “rules of the road” for the family’s future ownership of the business. During the process, the family determines the company’s mission, values, and short and long-term goals. Having an agreed upon foundation and vision for the company is helpful to determine during the divorce process, if possible, instead of later when there are diverging interests and desires for the business.
We also will ask the family business owners to determine what business decisions need to be made together and establish what happens when there is an impasse on a major decision that has to be made together. If there is a board that steps in to make decisions during an impasse, we’ll also want the board to rely on the Family Business Constitution to help guide their decisions.
While I may be attempting to make this process seem very straightforward and easy, it doesn’t always go that way. Most entrepreneurs have a lot of emotion tied to their business. An entrepreneur’s business often is a reflection of the business owner, and the business was built as a result of the entrepreneur's hard work, dedication, and risk.
Our experience with businesses and business owners makes us uniquely situated to assist both entrepreneurs and entrepreneurs' spouses through the complications of their divorce. If you are a business owner or are married to one in Lincoln, Omaha or Bellevue, Nebraska or Eastern Iowa (as well as surrounding communities) and are scared that a divorce might not be a viable option for you because of the business, call us so that we can talk about your options 402-548-5418.