How to Divorce a Business Partner
After two decades as the co-owner of a landscape materials yard in northern California, 57-year-old Debbie Hannan didn't just retire: She divorced her business partner. Though amicable, the split led to a drawn-out legal battle over the terms of a settlement. The divorce, begun in August 2007, took nearly a year to finally close.
More than 1 million husband-and-wife teams run businesses together, according to the National Federation of Independent Business, and as with most businesses, the recession has put an economic strain on the ventures. At the same time, marriages remain rocky: In spite of data that suggests that married couples postponed divorce for economic reasons during the recession, the divorce rate stayed basically flat from 2005 to 2008, at about 17 per 1,000 married women. And while no one tracks the number of business-owning couples who split, or the number of divorces that also result in the dissolution of a family-owned business, when a business-owning couple splits, the complications are more than Judge Toler can handle.
The risks -- and options -- become especially stark as a divorcing couple gets older, experts say. As retirement grows closer, any retirement savings takes on added importance; that pot of money is considered marital property, and once the divorce is final, so is the distribution of assets. For business partners, the best way forward after a divorce depends on the nature of the venture and industry sector, as well as an ability to get along, if only at the workplace.
Gregg Herman, a family law attorney based in Milwaukee, says a common approach is to let one partner buy out the other. There are many ways to do that -- all at once or over time, as a 50-50 split or in some other proportion -- but good accountants can help value the business, which is critical, he says. "But what's really important is to do this in a co-operative way, since the business is the goose that lays the golden egg and you don't want to kill it." That kind of transition becomes more difficult if the couple shared crucial roles in the business, such as day-to-day operations, or key points of contact with customers and suppliers -- the "vital organs" of a company that can't be so easily separated without hurting sales, he says. That's especially worrisome now, when access to capital is still tight, which can make it harder to bridge a lag in sales with credit.
If that can't be solved, the couple might consider dividing their business in two. Herman recently helped a pair of dentists who divorced after sharing an office for years. Since each had their own patients, they opted to split the practice down the middle, and continue to work together in the same office without any trouble.
Perhaps the riskiest approach is to continue running the business together even after the marriage ends. To keep the peace over the years to come, Otis Baskin, a consultant with the Chicago-based Family Business Consulting Group Inc., suggests setting up a board of directors to ensure key decisions are based on a business perspective, rather than a personal grudge. "You don't need million-dollar directors," he says. "You just need people with good business judgment who don't have a dog in the race." And, he notes, this works only if the couple has established a strong working relationship that's separate from a soured personal relationship.
When all else fails, most lawyers will advise selling the business and splitting the assets -- a risky proposition, since only about 30% of small businesses on the market sell, industry figures show. In the end, Hannan's ex-husband bought out her share of the landscaping yard for more than $500,000 and continues to run the business today. She was satisfied with that arrangement, she says, but remained frustrated by the drawn-out legal battle that seemed driven more by lawyers than by Hannan and her ex. In response, Hannan and her 36-year-old daughter, Becky Shook-Wotzka, launched the first U.S. outlet of Fairway Divorce Solutions, a Canadian franchise that offers independently negotiated divorce settlements through mediators, rather than lawyers, with an eye to financial planning. Based in Sacramento, they now have four employees and are on pace to hit 120 clients and more than $100,000 in revenue by the end of the year.