Do you have a business partnership? If so, your partner’s marriage is your business. For starters, your partner’s spouse probably owns a part of your company, whether you like it or not. It can be shocking to realise that the valuation, ownership structure and day-to-day operations of your business can be affected by your partner’s marital strife. So say business attorneys and financial strategists in an article on entrepreneur.com:
“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.”
The experts recommend 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 a loan.”
A stitch in time saves nine—work it out well before trouble has the potential to arise:
“To ensure that the ‘right to purchase’ can be upheld in 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.”
Despite such planning, divorce can still greatly affect business operations due to the chaotic effect someone’s disintegrating love life can have on their ability to properly conduct their business life. Partners may have to withdraw from day-to-day operations while they sort out their personal life, which may well have a discernable negative effect on the running of the business. The experts’ advice is to ‘plan for the worst’ by setting up a legally binding plan which sets out how to proceed in the event of such a situation:
“(Have a plan) 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?”
Individuals should also protect themselves and their business with a pre- or post-nuptial binding financial agreement (BFA) which sets out how a business will be valued and distributed in a divorce. This can be done as part of strategic business legal advice. If you choose not to get a BFA, consider getting an appraisal of the business, so that you can at least show what the value of your business was when you entered the marriage. This will also enable any appreciation of the business during the marriage to be ascertained.
For those who are running a business, these issues are food for thought, and well worth raising with your financial advisor, your business lawyers and a family lawyer.
And for a referral to our recommended accountants and financial advisors, please feel free to contact Alliance Family Law on (02) 6223 2400.