Divorce can be a challenging period of transition in the life of any individual. People are surrounded by emotion and anxiety as legal and financial matters are sorted out. It can take time for the couple to adapt to a new phase in their lives.
It should come as no surprise then that divorce often has a significant impact on the functioning and financial wellbeing of a small business that is owned by one or both spouses. Indeed, the stress that both parties often feel and the significant demands that are placed on their time and energy during the divorce process is enough to slow the pace of operations, affect their sound judgment, and ultimately dip into the bottom line. In addition, a small business is often one of the largest assets that the couple owns. Its value is usually the subject of great debate, as is the way in which it will be divided.
The process to legally determine the value of the business can be costly. It requires time and effort to produce the necessary documentation and paperwork for the business appraisers. Once the value is determined, one spouse may be obligated to purchase the other’s shares or a marriage court may order the parties to liquidate and divide any business assets that are found to be part of the marital estate. In the end, the business itself may be at stake.
Luckily, there are a number of steps that a couple can take to minimize the impact of a divorce on a small or family-owned business.
On the top of the list, of course, is to plan ahead and take adequate measures to safeguard the company in case of a divorce. A small business owner contemplating marriage would be fit to consider a prenuptial agreement. Such an agreement can be used to set forth each spouse’s rights and how the business and its assets would be divided in the event that the marriage does come to an end. Those who are already married have the option of entering into a postnuptial agreement, which can essentially achieve the same purpose as a prenup.
The legal structure of the business is also an important consideration. Corporations, partnerships, and LLCs are recognized entities with separate legal status from their owners. While a court can order an individual to do certain things, it does not have authority to prescribe a course of action for the business, as a distinct legal entity. In some cases, the company’s assets will not be considered part of the marital estate.
A well drafted partnership or shareholder agreement can be used to spell out how challenges are to be overcome. For example, what happens, when and if, one of the parties wants to part ways. It can also be used to compel the parties to submit to arbitration or mediation to settle disputes. A buy-sell agreement, which is triggered by certain events, such as divorce, can also be used to outline a buyout scheme, specify a mechanism for determining the value of the business, give either party a buy back option, and restrict the sale of shares to a third party.
In the event that a couple decides to divorce and no safeguards have been put in place to protect the business, it is imperative to seek qualified legal representation to guide an individual through the divorce process and counsel him or her on how best to handle issues related to the business. Determining the value of the business is often one of the most challenging tasks in the divorce process. One option for the parties to consider is hiring a joint financial expert, which can prove less costly and time consuming.
Also, the couple may wish to consider mediation or some other form of alternative dispute resolution that would enable them to maintain more control over the eventual outcome, protect confidential company documents, and help ensure the viability of the business. Experienced and knowledgeable legal counsel can assist the parties to consider these and other options to protect their interests.
The Minneapolis divorce attorneys at Mundahl Law are equipped to help business owners cope with the anxiety and concerns of divorce and minimize the impact that it has on their small or family-owned business. While we are always prepared to pursue any case to court and fight hard for our clients, the attorneys at Mundahl Law are also experienced in utilizing mediation and negotiation to help the parties amicably settle their disputes with the least disruption to their business. If you are considering divorce or have already taken steps to that end, contact us to learn more about how we can help you and your business.