If You Are A Small Business Owner Facing Divorce, Get Specialized Help

They are in the news every month – the celebrity or business owner going through an excruciating divorce that threatens to wipe out their life’s work.  I was reading an article recently about Frank and Jaimie McCourt. Frank (and arguably Jaimie) was the owner of the L.A. Dodgers until the divorce closed the door.  Ms. McCourt fought her husband tooth and nail for half ownership of the team.  When it was over, Jaimie agreed to surrender the bankrupt team to Frank in exchange for a promise of about $130 million. 

What has that got to do with you?  Maybe more than you want to know.  It is a great example of the risks of going through a divorce that involves a family business.  While most of us don’t have a gazillion dollars to fight over, many of us own small businesses.  Often one or both spouses work in the business, and when the divorce comes along, sorting out the pieces is a nightmare.  And that is just between the two spouses!

It is common for two or more individuals to own and run a business together.  One owner gets divorced and the other owners suddenly find themselves in a bad place.  Business records may be scrutinized in the divorce by experts for the parties and by the court.  The non-owner will often claim an interest in the business and may even try exerting some control over the business.  Can you imagine the heartburn?

There is no way to be completely certain to avoid such headaches, but there are precautions that may provide the business owner some security and may minimize the turmoil.  Prenuptial agreements setting out the rights of the spouses in the event of a divorce are great if done properly.  They can specify how any business interest will be treated in the event of divorce – up to and including exclusion of the business from the marital assets. 

A buy-sell agreement between owners is also critical to minimize the uncertainty associated with the divorce of any owner, since it establishes rights vis-à-vis the owners of the company.  Such agreements determine what happens if one of the owners dies or leaves the company.  I’ve heard them referred to as prenuptial agreements between the owners.

If you are unsure of where your business stands, or you own a small business and are facing (or are in the midst of) a divorce, you need to consult with counsel who are experienced not only in the field of family law, but in the field of business law and contracts as well.  If you find yourself in such a situation, give us a call.  We can help.

PROS AND CONS OF PRENUPTIAL AGREEMENTS

Prenuptial agreements are subject to some serious misconceptions.  They are neither the savior nor the destroyer of western civilization – or of marriages.  There are numerous advantages and disadvantages to prenuptial agreements.   Consider these strengths and weaknesses:

Strengths

·         If you have children or grandchildren from a prior marriage, a prenuptial agreement can protect their inheritance rights.

·         If you marry someone with a lot of pre-marital debt, a prenuptial agreement can protect you from taking on the spouse’s obligations.

·         If you own a business – including a professional practice, a prenuptial agreement can protect that interest and free it up from a messy entanglement in the event of a divorce. 

·         A prenuptial agreement can cover details of decision-making unrelated to money – i.e. responsibility sharing. 

·         A prenuptial agreement can avoid or reduce the amount of alimony paid by a party to divorce by looking ahead.

·         Older persons marrying for a second or subsequent time can protect their wealth.

Weaknesses

       ·         You could end up giving up rights to property, inheritance rights, or other benefits through
               a prenuptial agreement that you would otherwise be entitled to.

·         An unwary spouse could give up her right to recover from a business’s increase in value where he or she has contributed to the business throughout the marriage.

·         It can be hard starting your marriage with even a suggestion that you either do not trust your prospective spouse or that you don’t expect the marriage to last.

·         It’s hard to know today what tomorrow will bring, much less to know how potential issues should be handled ten years or more down the road.  Situations can develop over time that make well intentioned plans cumbersome or unmanageable.

·         While you may see yourselves as moving forward on equal footing, it is possible – if not common – for one spouse’s earning capacity to develop over time in such a way as to create vast disparities.  It’s usually hard to predict that eventuality.  

·         It’s easy to make decisions while you are emotionally vulnerable that, in hindsight, you would never have agreed to.

For these reasons, it’s often good to have a professional working with you on your agreement.  He or she can help you to avoid some of the more common pitfalls, avoid the bad decisions made based on emotion, and put together something that is reasonable and protects your interests in the long run.