Divorce and the Family Business – Part 2 – Who Stays and Who Goes?

Both parties are often emotionally as well as financially invested in the business. It may have also been a major part of their social lives as is found with franchise owners who develop a business and social community. Working together after divorce is an admirable goal, but it may not be realistic for many divorcing couples. A key question to answer is: After the divorce can I continue to see my ex every day and work together to run the business? More often one party would be working for the other. Separating personal issues that gave rise to the divorce from entering into the workplace is very challenging and for the majority next to impossible.

A divorce can be an emotional and contentious matter, as a couple has to divide assets, such as the matrimonial home, agree on child custody, visitation, co-parenting and support. Divorcing couples often do not see eye to eye on these issues, especially where considerable assets are involved. The business will either survive or die during the divorce process.

If the parties are not able to run the business together the natural question that follows is: Can one party run it on their own and if so who?

Factors in Deciding Who Should Stay or Who Should Go?

Calm and clear rational thinking is required when assessing who stays or goes, not easy in an emotional process like divorce. The use of a neutral mediator can help the parties analyze their respective needs post-divorce and how best to maximize their joint net worth from the business. Divorce lawyers advocate and fight for their respective clients but such an approach is adversarial in an already emotional situation and may pit one against the other. The best answer may be a compromise.

Factors I use to guide couples to determine who stays and who goes include:

1. Primary Contributor – Which party had a more active role in the management, innovation, development and sales of the business, that without them the business would falter or not survive? Although each may have contributed, quite often one spouse may have had the primary or dominant role in the business. I often hear “I built the business”. Or “I am the business”.

2. Knowledge of the Business – Both parties may have been active in the business but the key knowledge of the business may reside in one party as one spouse may have had an administrative role and does not possess the knowledge to grow or sustain the business.

3. Legacy Family Business – If the business was handed down from parents, it may be the desire to keep the business in the “family”. If the in-law was running the business consideration would need to be given to whether there was another family member who could assume the in-laws role or ownership. If not are they prepared to let the family legacy go?

4. Relationship with Employees and Management – “The toughest situation is where both partners in the marriage are both active partners in the business – where family members and employees end up getting involved by taking sides with one partner versus the other partner” says Don Schwerzler , founder of the Family Business Institute. The remaining spouse will need good working relationships and the support of staff.

5. Parenting Demands for Children of the Couple – The parties may still have minor children that require care and as such limits the time as single parents they can spend in the operation of the business.

6. Need for Income from the Business – Both parties may have drawn earnings from the business as a form of income splitting or salaries paid for work may be higher than market rates. These income impacts would need to be addressed in order to reach agreement on what terms a spouse may exit the business. The exiting spouse may not have good employment options outside of the business and would need to be compensated for that.

7. Ability to Buy Out the Other Spouse – Half of the business value needs to be paid out by the remaining spouse and can prove to be crippling to the cash flow of the business and the spouse. Banks will only provide financing if they feel the spouse retaining the business will be able to operate and continue the business.

Role of Mediator

The role of the mediator is to remove or mitigate the emotion and have the divorcing couple take the “divorce” out of the business decisions that need to be made. Continually refocusing them on answering the question: What is in the best interest of the survival of the business which is then in our best interests and that of our children?

In the next segment I will focus on the key success factors of working in the family business post-divorce.


Mary Krauel, Senior Negotiator/Mediator – PRM Mediation – www.PRMmediation.com

Divorce, Corporate, and Elder Care Issues – Serving Southwestern Ontario from Mississauga and London.