I was disappointed as I approached a favorite business only to find it had closed its doors for good. An employee of a neighboring business told me it closed because the owner had gotten a divorce. As a divorce lawyer, this made no sense to me. Why would a divorce cause a business to close? Who would possibly gain by this? Not the owner, certainly not the customers and even the ex-spouse would be disadvantaged by the business being closed. Yet it does happen and it can be avoided. Here are some examples from my own experience where a business has been put in jeopardy during a divorce. Of course, the facts are altered and I have used illustrative composites to preserve the privacy of these real people.
Interference with lending activities
Ron had a very successful wholesale business. When his wife filed for divorce, she got what are considered to be standard financial restraints. These restraints prevented husband from borrowing or pledging property "except in the normal course of business." I"m not sure what normal course of business means and apparently neither does the bank because they put a hold on his line of credit and stopped all lending. Ron's business required funds to purchase inventory to fulfill orders. His customers generally paid in 30 to 90 days. The line of credit was vital to his business. As he was less able to fulfill orders, his sales dropped dramatically.
Ron was eventually able to recover after the divorce but the value of the business, and thus the wife's share of community property was greatly reduced. Ron's wife's attorney, by not considering the impact of her actions on the business, actually reduced the amount of wife's ultimate settlement.
Refusing to accept payments over time
Beth had built a unique service business that had grown over time and according to the business appraiser, had great future prospects. Beth offered her husband time payments for his community share of the business but husband refused. He wanted to be paid in a lump sum. Beth had to sell assets and equipment in order to be able to buy her husband out of the business. Soon after her business failed because she just didn't have the resources to continue. Her husband got a nice lump payment as settlement but now, since Beth's income is significantly reduced, he has to pay higher child support. He made a short term decision that cost much more in the long term.
Interfering with business operations
Mike was a great entrepreneur and had many business operations. He often leveraged one property to fund purchase of another. His business also was successful because he fostered good personal relationships. His business suffered from the divorce in more than one way. One, because he was distraught and distracted by the divorce and the attendant subpenae, depositions and interrogatories, he wasn't as attentive and he let management decisions be made by his less experienced employees. He also had trouble with financing because his wife would not agree to the financial arrangements he was trying to make. His wife and her attorney also called upon his business associates and queried them extensively. Soon they became reluctant to enter into new ventures with Mike.
I began working with Mike after the divorce had been going on for over a year. His instructions to me were to "just make this go away." We did settle the case within a short time. As I reviewed the file I compared the original offer made one year earlier and found that the value of the business had dropped almost in half. The wife spent $150,000 and a year to get less than the husband had offered a year earlier.
Sally was a managing partner in a boutique financial services firm. She very much tried to keep her personal life separate from her business life but the two really merged when she was dissolving her marriage. Her husband's lawyer demanded access to confidential and highly sensitive information such as board of directors’ minutes and all the partnership agreements. Understandably, some of this information was necessary to evaluate the case but a less adversarial discovery plan could have saved everyone time, preserved privacy, reduced emotional trauma and saved Sally's career.
The outside board of directors were not pleased with the additional work and were worried about release of sensitive information into public record. Sally was replaced as managing partner and her career took a hit.
Again, who gained by this overly aggressive discovery?
No Clear Lines of Authority
Larry and Louisa owned a commercial property. Louisa generally did the bookkeeping and collected the rents. Larry managed marketed the property and took care of maintenance. As their marriage crumbled, so did their business relationships. Larry and Louisa worked at cross purposes with one making promises to the tenants and another refusing to honor the commitment. Things really came to a head at lease renewal time when the tenants decided it was no longer a good fit and did not renew their lease.
When Larry and Louisa finally did divide their property, the value of the commercial building was much less. Cooperation could have avoided this. A paid property manager could have kept the tenants shielded from Larry and Louisa’s bickering.
Airing dirty laundry in the workplace
I probably don't have to tell too many stories to make this point. Everyone has numerous stories of bad behavior in the workplace: the wife who stomps into the business making hysterical accusations, or the husband who made a scene at the company party. Now with the omnipresent social media, folks have an even better opportunity to embarrass each other and themselves.
From a financial perspective this behavior damages everyone. People have lost jobs, not received promotions and business is interrupted. Besides the emotional cost, both parties suffer financial costs.
And it didn't have to happen.
Respectful, cooperative divorce makes economic sense
Most people expect that behaving in a cooperative manner (like grownups) saves money, time and emotional trauma in a divorce but these examples show that being respectful respectful and cooperative often means there will be a better financial settlement.
This doesn't mean there shouldn't be discovery and that all the financial information shouldn't be shared. It doesn't mean that you don't have a fair business appraisal. This is necessary in order to have an equitable division of property. However, being respectful and cooperative means that the parties develop a financial discovery plan together. Perhaps even agreeing to use neutral experts instead of having a battle of the experts. Furthermore, by cooperating, the parties keep their private information out of the public record and can keep the negotiations and ultimate settlement confidential.
There is no reason a business should have to be closed because the owner got a divorce.