Are you in the thick of your business partner’s divorce too? The short answer is yes. Not only are the other owners likely to be pulled into another owner’s divorce, but the company itself can become a named party in a future litigation if things get ugly between the divorcing couple.
Most business owners have not divorce-proofed themselves against what is becoming a common event. Turning a blind eye to the divorce challenges of your business partner could result in significant costs to the business, a decline in business value, revenues, and increased indebtedness or at its worst the demise of the business. All that you worked for could be destroyed by another’s divorce.
The gloves come off in divorce and undocumented transactions, or expenses that might be considered personal may be revealed in open court leaving the company and its shareholders open to other risks including tax audits. Once in the public domain, there is little or no protection for confidentiality and the company’s finances, operations, and intellectual property could come under scrutiny in defending a valuation – all subject to view by competitors. So the best advice I can give the other partners is to be proactive and strategically yet neutrally support the divorcing owner and their ex-spouse. By helping them, you help yourself. Consider these steps.
Avoid Unnecessary Costs
Keep them out of court and the legal system. If the divorcing couple cannot reach agreement or the ex-spouse feels that they are not being provided relevant financial disclosure litigation will happen and the company, other owners and staff will be issued court orders and subpoenas to testify or produce financial information. Auditors, Business Valuators and other experts will be involved with horrendous cost to all not to mention the time taken by staff to answer their questions. Be open with the books and make yourself available and fear and mistrust will be mitigated.
Keep the Divorcing Owner Focused or Suggest a Temporary Leave
Divorce is a distraction to everyone. Quite often the divorcing person is absent, late, and when in attendance may not be productive but instead dysfunctional. It is in the best interests of the business for the divorcing person to be focused by assigning them specific tasks, shift responsibilities until the divorce is over or to even suggest a temporary leave so they can give their personal matters the attention it requires and then return to reengage in the business. You and the rest of the staff can then run the business.
Independent Valuation by Accredited Professional
The temptation is great to undervalue the business not only by the divorcing owner but by its partners as this would have less of a financial impact on the business in order to provide the liquidity for the divorcing partner to pay out to the ex-spouse. The cost of getting a proper valuation is not inexpensive and often partners wish to “arrive at their own value” to avoid the cost of a professional valuation. But “penny wise is pound foolish” as there are many risks. If agreement is not reached both parties may end up getting a valuation which likely will have different values leaving a judge to settle it in court.
Create Options to Finance Payout
In Ontario, ownership in assets does not need to be divided with the ex-spouse. The Family Law Act only requires the “value” of the property to be shared and divided equally. Since the only source of cash for the divorcing owner likely will come from the business all owners need to be active in creating options that would not drain the company’s cash flow and impair its liquidity such that operations are handicapped. Reduced mistrust and fear increases flexibility and creativity. If there is sufficient trust by the ex-spouse in the business owners, then more options can be available like preference shares, non-voting common shares, etc.
Participate in the Divorce Process
As co-owner you have a vested interest in ensuring your business partner concludes his divorce settlement as quickly as possible. I have had co-owners attend the one on one meetings I had with the divorcing party. In one case, he was able to bring his own life experience of a divorce to the discussion and calm his partner who was ready to fight his ex. He reinforced my guidance during mediation and outside of our meetings. He actively participated in exploring creative ways to help his partner pay out his ex from resources within the company. Because he had a relationship with both parties, he made himself available to the ex-spouse to help with the understanding of financial disclosure. I commend him for his effort.
So preserve your investment in the business by lending a helping hand to your divorcing business partner.
Mary Krauel, Senior Negotiator/Mediator – PRM Mediation –
Divorce, Corporate, and Elder Care Issues – Serving Southwestern Ontario from Mississauga and London.