How to Minimize the Impact of Divorce on Your Small Business

Divorce Proceedings Can Stall Operations, Distract Key Employees, and Require Expensive Outside Counsel. Here’s How Good Planning Can Mitigate the Costs.

Solid legal counsel, pre- and post-nuptial agreements, shareholder agreements, confidentiality, and structured settlements can all ease the strain on a small business during a divorce proceeding, explains Jennifer A. Brand at the Fox Small Business Center. Find out the details.

Divorce in itself is often devastating to the parties involved, but when one of those parties is a small business owner, the business can be affected as well.

Aside from financial concerns, anxiety and emotional turmoil usually associated with divorce can have a major impact on the business.  It can affect the person who is the party to the divorce, as well as other business partners and employees.

In connection with the distribution of assets in the divorce, the business will likely be valued. This will require a financial expert who will be scrutinizing the books and records of the company. Questions will be asked about business practices and expenses. Financial documents concerning the business must be produced, and there is a risk that confidential information may be disseminated.

There can also be a significant cost for the business valuation. Oftentimes two financial experts are engaged (one for each party).  Employee hours must be taken away from the work of the business and time must be spent gathering information for the valuation(s). 

Business operations are often stalled given that if the business improves, the value of the business increases and additional monies will have to be paid to the spouse.  In the worst case scenario, the business may even have to be sold in order to pay the non-owner spouse his or her share of the business.

There are ways, however, to minimize the impact of a divorce on the small business:

No. 1: First and foremost – get legal counsel.  A good divorce attorney will have extensive experience in managing both the personal and business aspects of a divorce, and can provide counsel on how to reduce the impact on the business. 

No. 2: A prenuptial agreement or a postnuptial agreement (entered into after marriage) can predetermine the distribution of assets in a divorce, and thus can protect the business. 

No. 3: If there are multiple business owners, the business partnership agreement or shareholder agreement can address a methodology of buyout or valuation of interest if a divorce is filed against one of the business owners.  While this type of instrument may not bind the family court, it does show an intention to minimize business disruption in relation to the other owners which a court would likely respect. 

No. 4: If the first two agreements don’t exist, the parties can agree to hire one joint financial expert to value the business which will help streamline the process and keep costs down.  To the extent the books and records of the business are well organized and readily available, the valuation will likely move more rapidly.

No. 5: The parties, counsel and any experts involved can enter into a confidentiality agreement to protect sensitive information and give assurance that trade secrets will not be disseminated. 

No. 6: To avoid the sale of the business, oftentimes a settlement can be structured with payments to a spouse made over time so the business is preserved.

Involvement of the small business in a divorce is inevitable given that it is frequently the largest marital asset owned by the parties. However, by following these few tips, the business can be protected with minimal disruption.

Jennifer A. Brandt, is a family law attorney specializing in divorce, custody, alimony, support and distributions of assets who is a member of the law firm Cozen O’Connor and who answers legal questions on Avvo.com, a free social media platform that provides a health and legal Q&A forum and directory which rates and profiles 90 percent of all doctors and lawyers in the U.S.