Introduction

According to Investor’s Business Daily, husbands and wives jointly own and operate 3.7 million businesses here in the United States. With close to half of all marriages ending in divorce, those who own family-based businesses may justifiably ask: “What happens to our company after the business partners are no longer spouses?” Divorce creates major hurdles for keeping the cash flowing in a family-based business. Unless the parties choose their steps wisely and carefully, a business divorce could easily follow from a marital one.

Division of assets, including the business

As an equitable distribution state, New Jersey generally divides assets between the spouses on a 50-50 basis. A decision to stop being marital partners won’t necessarily end the parties’ relationship as business partners. This is true even if the business is run by one spouse without input from the other. Barring the existence of a prenuptial agreement that determines ownership post-divorce, divorcing spouses will need to choose among these basic options: (A) remaining in business with each other pending divorce and even after; (B) selling the business; or (C) horse trading assets in a manner that permits one spouse to retain ownership of the business and the other takes a cash buy-out and moves on.

“What if the spouses/business partners can’t agree on anything?”

If the parties can’t figure out how to make a deal, then one or both of them will have to make an application, possibly on an emergency basis, to the Family Court as a Court of Equity to figure out how to keep the business intact pending the divorce. There are many methods that are available in lieu of the parties’ cooperation with one another. All of the methods are time consuming and expensive, and will detract from the company’s profitability. At the extreme, a third party neutral appointed by the judge, such as a Special Fiscal Agent, will operate the company on the parties’ behalf. This expensive and inefficient result to be avoided if possible.

Partners for life?

Remaining business partners in a highly profitable venture may not seem like a terrible idea, even in the throes of a divorce, it rarely proves workable long-term. Among the issues divorced couples face when running a business together are residual resentment from the divorce, friction connected with their exes’ new romantic partners, loss of morale in the company workforce, and inability to make business decisions free from emotional factors. The combination of these challenges can be disastrous in future interactions with clients, customers, and employees.

Some business partnerships, it is true, remain intact post-divorce, but they are the rare and admirable exceptions. For everyone else, there is third party sale or a partner’s buy-out. If both parties want to make the purchase, then a private auction may be arranged easily and informally. The high bidder prevails.

Injecting the voice of objectivity and securing a strong and compassionate legal advocate

Any final settlement agreement the parties may reach should prioritize the business as a going concern over the interests of any specific shareholder.

The parties should strongly consider hiring a neutral financial advisor or business appraiser at the outset. This professional will provide a realistic assessment of the business’s worth, which can serve as a baseline in making decisions regarding division of assets. As a corollary, while compassionate counsel is critical in all divorces, the need for such understanding counsel in divorces involving family-based businesses is even more acute. Attorneys in these cases should be selected based upon a track record of proven results in divorces involving family businesses.

The Benefits of ADR to Family-Based Businesses during the Principals’ Divorce

Family-based businesses in the throes of divorce require speed, privacy, and flexibility to recover, survive, and thrive.

The parties should strongly consider Alternative Dispute Resolution (“A.D.R.”) in such cases, in a signed writing, starting with mediation or collaborative law counsel, and ending with private, binding arbitration, no right of appeal. This way, the parties may act quickly, privately, decisively, and with a premium on self- determination and staying out of court. If any issues remain unresolved, then there is a definitive and enforceable fallback position available in arbitration.

Conclusion

If you or someone you know is involved in a family-based business, and also faces divorce, please write or call us today for an initial consultation on a reduced fee basis. We will help assess the facts, explain the law, and create a problem-solving approach that will maximize the safety and security of the business while addressing the short-, mid-term, and long-range needs of our client.

If A.D.R. is indicated, we will explain the processes available, make recommendations, and take our clients through the selected method(s) confidently, compassionately, and successfully.

Please allow us to guide you or your loved ones through this challenging time.