Before
you formed your business partnership, did you vet your partners’ marriages
along with their bank statements? You may not consider it until divorce proceedings
are underway, but your partners’ spouses likely own a part of your company, whether
you want them to or not.
In
my day job working on complicated (and often highly contentious) legal matters,
I rarely see a case where the day to day operations, valuations and ownership structure of a business
is not affected in some way by a
break up. If your partner ‘s soon - to –be ex receives a part of the
business in the divorce settlement
,you’ll gain a new , unwelcome partner who now has a voice in how your business operates and, by extension , can impact your own net worth.
We
recommends including a contingency for divorce in your company’s set up. “Start
with a well drafted partnership , ownership or shareholder agreement that
requires a partner’s spouse to sell his
or her awarded interest back to the company (or to its co-owners) in the event
of divorce.“ This buy -sell provision should contain a comprehensive list of
terms and conditions, including the method by which shares will be valued, the
transaction timeline and the source of funds to be used for the purchase, such
as cash on hand, an existing line of credit and/or loan.”
To
ensure that the “Right to purchase” can be upheld in the family court , it is
worthwhile – and often essential – to have all non-partner spouses consent in
writing to all aspects of the agreement long before any marital dispute arises.
In the event a buy –back is not possible, this agreement can limit an ex’s
voting rights and/or management participation. Even with such arrangements in place.
Divorces play havoc on operations. If one partner has to step away from the
day-to –day operations to tend to his or her divorce, the balance is thrown off.
Resources are spread thin, resentment increases very quickly, and the
partnership begins to look more like a sole proprietorship. The impact on cash
flow can be dramatic and devastating as well.
Plan
for the worst. Divorce, illness, disability or the death of a loved one will
affect your partner’s ability to contribute to the business. You need to set up
a legally binding plan that addresses how to handle these challenges. One that
answers some basic questions, such as how long one partner can step away from
the company before his or her compensation drops. Who will assume his or her
daily duties? If a loan or pay advance is needed to cover skyrocketing legal
bills, what are reasonable terms?”
These
are tough queries, but it’s better to ask them now than in the middle of a
messy divorce. Handled correctly, every partner, including you, should
come away with a greater sense of trust
in one another to do the right thing to preserve the company –even when
someone’s personal life is going down the drain.
M & A Legal Management
(888) 449-5841
