Add another layer to your #Business literacy. We at Serebral360° would love to know if the Forbes – Entrepreneurs article was helpful, leave a comment, like and share. Let’s dive in and discuss the information and put it to use to grow your business. #BusinessStrategy #ContentMarketing #WebDevelopment #BrandStrategy
Info@serebral360.com 762.333.1807 www.serebral360.com
Grap a copy of our NEW Business Stratgety Books #FFSS VOL1 and #FFSS VOL2
Your business partner is getting a divorce. Her husband is demanding “his share” of the company, yet he never had any affiliation with it. Is he really entitled to a cut?
Quite possibly. Unless certain provisions are in place to protect it, a business is considered a marital asset in many states, subject to division in the event of divorce. How much of an impact can this make on your company? Here are some factors that weigh into it:
Payout to the nontitled spouse. As your partner’s assets are split, her interest in the business is likely to be on the table. This can play out in a number of ways. For example, let’s say the divorcing partner decides to pay out her spouse with shares of stock. Now your partner has a smaller (or no) stake while her ex-spouse has a new stake, which might also include voting rights. If that nontitled spouse decides to dump the stock, it might negatively affect the value of your stock. If she instead decides to stay, you find yourself running the company with an uninvited partner, who, by the way, may know nothing about the business or your industry.
Alternately, the divorcing partner may choose to liquidate their interest to pay out her or his spouse. And while that may sound like a more positive solution, how much of a hardship could this present for your company and the remaining partners as you figure out where that liquidity will come from?The valuation process.
Your partner’s emotional distancing—or worse. Divorce can become all-consuming for the parties involved, so while it’s pending, your business partner may become less interested in the company’s health and well-being. Unfortunately, in an effort to reduce her financial obligations to her spouse, she may go so far as to consciously or unconsciously sabotage profitability or growth to make her own financial picture look less positive.
How to Protect Yourself and the Company
While it’s true this type of situation can get ugly quickly, there are steps you can take to avoid negative outcomes:
Have frank, early discussions with your partners. Imagine how much easier you would sleep at night knowing that every partner had a pre- or post-nuptial agreement in place identifying the business as separate property (not be subject to asset division). This is something you could agree to include in your formation documents or bylaws.
If you can’t reach consensus on this particular point, then discuss the wisdom of spelling out how membership interests can and cannot be transferred—namely that they can’t be transferred by a divorcing partner without the approval of the other partners. Incorporating buy-sell provisions into your formation documents can protect you from having to take on an ex-spouse as a partner; they specify circumstances for which partners have to sell their interests back to the company.
Keep the lines of communication open as the divorce proceeds so that you and the other partners will understand the divorcing partner’s position at any moment in time.
Compensate spouses that work in the business. Divorcing spouses who have played a role in the success of the business are likely to expect a larger share of its value, especially if she or he donated time or labor. Pay spouses competitive wages for any work she or he does so that, in the event of divorce, it will undermine her or his claim that they’re entitled to more.
Change from preferred to common shares. If you sense that a divorce is on the horizon for one of the partners, you can consider preemptively changing the type of shares from preferred to common to eliminate the transfer of voting rights. This could potentially reduce the value of their interest as it may result in a discount for lack of control.
Insist on a confidentiality agreement. As the divorcing partner produces documents about the business, make sure that any information they provide is held confidential by all parties. A confidentiality agreement will ensure that no one in the matrimonial case has permission to use it for any other purpose.
A partner’s divorce can most certainly have an impact on your business. Consider this before you start a new business or, if you already have a business that could be vulnerable, sit down with your partners today to discuss smart measures to protect all of your interests.
March 11, 2019 at 05:41PM
Forbes – Entrepreneurs