Divorced spouses, business co-owners

There are many difficult decisions couples face when they divorce. Along with dividing personal belongings and establishing a workable child custody arrangement, many divorcing couples face the challenge of deciding what to do with one of their most important assets: the marital business.

One option is for one spouse to leave the business, requiring that the other spouse buy out their interest. In the current economy, however, this may not be feasible. The couple may not have the liquidity available and getting a loan to finance a buy out may prove difficult, if not impossible. Everyone is aware that credit is tight and banks simply are not lending the way they used to. Further, if both spouses are relying on the income from the marital business for their future livelihoods, the buy-out option may not be an acceptable solution.

If the parties do not wish to close down or sell their business, they are left in a situation where they must continue to co-own and operate their marital business together as business partners after the divorce. The problem, of course, is that the same personality conflicts that may have led to divorce may also make it difficult to continue in business with a former spouse. It is not, however, impossible for ex-spouses to co-own and operate their business. The couples that have success in such a venture must be able to separate business matters from personal matters. Divorced business owners should agree on ground rules for effective communication and dispute resolution that will keep the business focused on business. However, if that is not possible, there are options divorced owners should consider to preserve their valuable business.

Below are some strategies to keep the business moving forward in such circumstances:

Segregate duties: A key element in any successful partnership is an efficient division of labor and duties. This is particularly important in the case where ex-spouses co-own a business. In these situations, each party's roles should be formalized in a written agreement so as to avoid either partner infringing on the other's realm of managerial control. Formal division of duties can avoid unnecessary conflict and clearly delineate each party's expectations of the other.

Establish a board of directors: Establishing a board of directors of persons with good business judgment and appropriate business backgrounds is not essential for every business, but it can be very helpful for a marital business whose owners are divorced and unable to see eye-to-eye on the major and daily business decisions. The clear benefit of appointment of a board of directors is that the board would be more likely to make decisions based on sound business perspectives rather than personal grudges, revenge, greed or spite. Of course, this may require amendment of existing bylaws or operating agreements, which would require that both spouses agree on the manner of selecting the board.

Employ a business advisor: In situations where the divorced owners generally agree as to how to operate the business but occasionally reach a stalemate, it may be wise to employ business advisor to help make important decisions. A business advisor can help management narrow business objectives and develop business strategies. A business advisor can provide valuable insights from a neutral perspective that both parties trust is not for an ulterior motive.

Hire a certified mediator: As an alternative to continued conflict or litigation, mediation of business disputes is a less expensive and less time-consuming option for divorced owners of a business than continued litigation. Control of the business is left in the hands of the disputing owners and leaves the parties free to fashion their own solutions. When problems arise, however, mediation provides the opportunity to resolve disputes non-adversarially so the business relationships and the business may continue even if the personal relationship is beyond repair. Business mediation is a means by which partners can engage in a process that supports their common interests, builds on their areas of agreement and moves past the emotional issues that may be fueling the conflict in the first place.

Appoint a receiver: A receiver is a person or entity whose duty is to assume custodial responsibility for the property of others, which may include a business. The process for appointment of a receiver can be complex and is beyond the scope of this article, however, a marital business could be placed into a receivership when the divorced owners simply cannot work together to make decisions but out of necessity the business must continue to be operated in a commercially reasonable manner. In that case, the receiver has the power to run the business for the benefit of both spouses. Employing the assistance of a receiver can be expensive, but if the business is worth saving, the cost will be justified. Placing a marital business in receivership should only occur in the most acrimonious of post-divorce business relationships where there are allegations of bad faith or hiding assets.

Finding a way to properly handle the co-management of the marital business after divorce may be difficult. Such an arrangement will most definitely require mutual respect for the business relationship and a common focus on keeping the business profitable if it is to succeed long-term. If divorced owners are having difficulty making decisions because they cannot separate business matters from personal matters, their business may benefit from utilizing one of the above strategies. While these options will require additional money and effort, they may be worthwhile to preserve a successful business and should be given consideration. They may be better than the alternatives the loss or failure of a successful business.

Jessica H. Anderson is a shareholder with Woodburn and Wedge with her practice area focusing primarily on family law. Contact her at anderson@woodburnandwedge.com or (775) 688-3002.