The Do’s and Don’ts of Divorcing Your Business Partner

Articles | 10.27.2016

Check out Diana Powell’s article at ColoradoBiz Magazine Online.

You are divorcing your business partner. Your dream of having it all―love, money and work with a partner who would always be on your side―seems to have turned to ashes. You face the simultaneous loss of your marriage and your business reality. Your business partner seems hostile and unapproachable. You are worried about your future and that of your business.

You are right to be worried. Whether your business is wildly successful, just successful enough to pay the bills or teetering on the edge of insolvency, you are at an important crossroad. Your financial future depends on how you and your partner meet this challenge, and how you both manage the business during your divorce.

You are not alone, and your divorce is not the first divorce of business partners (which in this context, describes any co-ownership of a business and is equally relevant to co-shareholders, co-members or co-owners of interests in any form in which the business is legally organized). According to published studies, more than 46 percent of family-owned businesses are challenged by the divorces of one or more owners of the business. Business owners get divorced at the same rate as other Americans. Fortunately, experienced practitioners who have handle divorces for business partners can tell you what works, and what does not.

Don’t Decide Immediately What Will Happen to the Business

If your divorce action just was filed, you should consider yourself too stressed, anxious and unrealistic right now to make sound decisions regarding the ultimate disposition of the business in your divorce. Don’t feel that you need to make up your mind immediately regarding which partner will stay in the business, whether the business will be sold, or whether any of a multitude of other alternatives should be chosen. You and your partner must give each other the time and grace to regain equilibrium to support appropriate decisions. You will both need to talk to experts, attorneys, coaches, lenders, friends and family before you agree on a longer term course of action. Right now, the most important goal is to preserve the value of your business during your divorce.

Preserving Business Value During Divorce

Here are some useful “dos and don’ts” to preserve business value during the divorce.

Don’t drag your employees, suppliers or customers into your divorce. None of them can really help in your decision-making and none of them should be made to feel insecure about the continuation of your business.

Don’t engage in heated discussions or pointedly cold exchanges while around your employees, suppliers or customers. It is in nobody’s interest to have these people decide the business is on the rocks just because your marriage is on the rocks.

Don’t run down your partner’s reputation for sound business decisions. Your partner’s earning potential will be important to you, when you can again think clearly.

Don’t ask colleagues to deliver messages to your partner. Owners of the business need to act like grown-ups, or you will weaken the commitment of those colleagues whose continued loyalty is important to the future of the business.

No matter how mad you feel, don’t take a scorched earth approach to the reputation or assets of the business, or your business partner. When you wake up at the end of the day, you will need for the business to be vital, and for your partner to be capable of earning a living, either inside or outside your business.

Even if there is an affair between your partner and an employee, don’t take any hasty action against the employee. Avoid name-calling. The employee, regardless of his or her poor judgment, may have legal remedies for sexual harassment by the boss with whom he or she had the affair, as well as wrongful termination if you fire the employee or treat them so badly they quit. Regard the work-place affair as an incredibly unpleasant symptom, not the cause of your divorce.

No matter how angry or depressed you feel, do show up and keep working in the business, and try to make the business environment comfortable for employees, suppliers and customers. Encourage your partner to do the same, by treating him or her in a cordial and appropriate manner—even if it kills you.

Regardless of what your bylaws permit, do remember that unilateral business decisions taken by the President or Managing Member of a jointly owned business may lead to adverse results in divorce court.

Do keep focus on the business while at the business. Save divorce discussions, including what will happen to the business, for other times and other places.

Do engage a neutral business coach, formally or informally, to help you communicate and find constructive ways of reaching ordinary business decisions during the divorce. Otherwise, the uncertainty regarding divorce outcomes can result in crippling deadlock in the business.

Do make the business as successful as possible this year. Don’t get confused into the zero-sum thinking that if you make more money you will just have to give it all away. Resist the impulse to run down the business results in an effort to reduce business value. Valuation depends on results from several years. You should expect that a Colorado court will consider whether you had “divorce flu” this year, if the business results end up substantially worse than in previous years.

Do maximize cash flow and preserve cash assets. You and your partner have some significant expenses ahead, and one of you may need cash to buy out the other.

Do keep careful business records. You may not like the treatment of cash outflows for which inadequate records are kept. [Do remember not to charge the costs of an affair on business credit cards.]

Do jointly inform your accountant, corporate lawyer and principal bookkeeper that you are going through a divorce and will need help gathering business data—otherwise they may think you are planning to fire them or sell the business when you start asking for documents. Ask them to keep the divorce confidential.

Do give careful thought to communications with other owners, senior executives, lenders, principal suppliers, or important customers. You may want to delay disclosure of your divorce, or communicate with these people jointly.  You do not want any of the critical people to become insecure, nor do you want them to start feeling pressure to align with one partner or the other.

Do consider asking for appointment of a qualified arbitrator or private judge to hear the divorce, if your business affairs are very complicated.

Do ask the court to limit access to your court file. Your colleagues do not need to know what is happening in your personal affairs. Nor do you want to depress or delay any offer that might be out there to buy your business.

When considering what should happen to your business in the context of your divorce, remember your overall goals in the divorce. Nobody benefits from a scorched earth approach. If you consider this a zero sum game, where you “win” if you have more dollars at the end of the game, you and your spouse will each have far fewer dollars than if your settlement posture is more flexible. To a remarkable extent, with appropriate strategies, you can achieve an appropriate and equitable resolution of business issues in your divorce, even if your partner initially seems hostile and unapproachable.