Entrepreneurs are incredibly devoted to the success of their business, but even a thriving company may be severely impacted by a high conflict marital divorce. When a couple decides to part ways, the ripple effects can extend beyond their personal lives and potentially jeopardize the business they worked so hard to build. Although the couple may have irreconcilable conflicts that require a divorce to take place, preserving the value of their business should be a mutual goal. While their marriage may not be salvageable, both spouses share an interest in maintaining the success (and the high value) of their company as they go through their divorce. 

The Cost of Business Disruption in Divorce Actions

When divorce proceedings become contentious, the business in which the marital estate has an ownership interest may experience negative effects as a spillover from the conflicts that take place during the divorce process. The potential adverse consequences to the business may include all of the following:

• Decreased productivity due to owner distraction
• Uncertainty and reduced morale among employees
• Loss of clients and loss of new business opportunities
• Substantially larger legal and professional fees
• Possible forced sale or liquidation of the business

These adverse factors can significantly reduce the business’ value, which can negatively impact the financial outcome for both spouses in their divorce. The elephant in the room here may be a cynical view that is held by the spouse who is seeking to acquire the interest held by the other spouse in the business in the divorce settlement. That spouse may believe that having the business crater during the divorce will allow the interest to be purchased for a below-market value and then the business will snap back to its true value once the divorce becomes final.

This self-serving view does not square with reality, however, for the following reasons. First, if the spouses do not shield the business from the conflicts inherent in the divorce, the negative effects are likely to be long-lasting with employees, customers and others, some of whom may depart or decline to do business with the company after the divorce. Second, the company’s competitors will see the business as weakened by the divorce and exploit this time of weakness. If the company loses market position during the divorce, this loss may not be readily regained once the divorce has been completed. Finally, a spouse who presents the company as having a steep loss in value to secure a lowball purchase price in the divorce may be opening the door to other negative outcomes, i.e., unintended consequences. These could include a lender declaring an event of default based on the company’s poor financial condition, the divorce court awarding the business to the other spouse, dealing with a hostile takeover attempt launched by the other spouse either alone or with employees and/or other investors, or the business being required to liquidate as problems cited by the spouse seeking a low-ball purchase price spin out of control.

The takeaway here is that a spouse seeking to purchase the interest in the business held by the other spouse is better off purchasing that interest by structuring the payment based on the company’s true fair market value. This avoids creating the potential for long-term damage to the business. In addition to the factors noted above, the divorce also likely impacts third parties, as well as the spouses themselves. Forbes reports that of companies that have more than 500 employees, almost 87% of them are privately held. Of companies this size, many, if not most of them, have multiple owners. When a divorce has potential negative consequences for other partners in the business, the stakes become even higher, because the other partners do not want their business dragged into a marital dispute. This multi-faceted ownership structure adds another layer of urgency in securing a prompt and amicable resolution of the business issues in the couple’s divorce.

Charting a Path to a Win-Win Outcome

While the risks to the business are significant in any high-net-worth divorce, there are steps the divorcing couple can take to achieve a positive outcome for their business for their mutual benefit. This type of win-win resolution is possible when the spouses seek to achieve a divorce that preserves the value of the business by taking the approach outlined below.

1. Prioritize Business Continuity: By maintaining the value of the business as their goal, this allows both parties to maximize their outcome. This requires the parties to keep the business running smoothly during the divorce, including by keeping matters related to the divorce as private as possible. While the spouses likely have serious issues with the other spouse that led to the divorce, these marital conflicts should not be shared with others who are active in the business, because it may disrupt the business. The message from the couple needs to be that they share a common desire to see the business continue to thrive during and after their divorce.
2. Obtain Valuation Result Without Trial: While it would be ideal for the couple to retain just one neutral business valuation expert to determine the company’s fair market value, that is not likely in the real world. Invariably, each spouse will want to retain their own valuation expert, but if they allow a dispute over the value of the business to become a battle of the experts that goes all the way to trial, that will prolong the divorce at great expense and also provide financial information about the business to competitors during the divorce proceeding. To avoid this unwelcome outcome, the couple can consider other options. They could agree to allow their valuation experts to decide on a third expert to value the business and then average the amount of all three valuation reports, or they could allow the court to appoint a third valuation expert who considers the other two reports and issues a final, confidential valuation report to which they both agreed to be bound.
3. Consider Creative Buyout Structure: To avoid a valuation fight that requires a full buyout upon settlement of the interest of one spouse, the couple could agree that one spouse will become the majority or the sole owner of the business, but the other spouse will retain either a minority equity interest or continued contract rights in the business that provide for the departing spouse to receive additional financial returns over time. This could involve the spouse who sells the interest in the business to receive:
   
   • An initial down payment
   • Additional installments paid over time
   • A profit or revenue-sharing arrangement, which is a form of earn out based on the future performance of the company
   • An option to sell the minority stake in the future – a put right that requires the majority owner to buy this minority stake when the option is exercised
4. Protect Other Stakeholders: If there are other business partners in the company, they can be involved appropriately in discussions about the company’s future, but in a private manner that ensures continued confidentiality. This buy-in of other partners who will support the creative buyout structure of a spouse’s interest in the business could be crucial for the company’s continued success.
5. Plan for Tax Implications: Work with tax professionals to structure the settlement in a way that minimizes tax burdens for both parties.
6. Maintain Open Communication: Strive for transparency and regular communication throughout the process. This can help prevent misunderstandings and build trust.
7. Focus on Long-Term Value: Rather than seeking short-term gains, the spouses should consider the long-term potential of the business and structure a purchase that provides for a fair return over a time that extends beyond the divorce. A thriving business after the divorce can provide ongoing benefits to both parties.
8. Seek Experienced Legal Counsel: Finally, engage attorneys who are experienced in high-net-worth divorces involving the division of complex business assets. This type of expertise and creative problem-solving can be invaluable in achieving a win-win resolution. Now is not the time to retain counsel to handle their first rodeo.

The goal of these strategies is to achieve a divorce settlement that is less contentious, more prompt, and more cost-effective, which will preserve the value of the business for the benefit of both spouses. Taking a  collaborative approach in the divorce proceeding not only protects the assets for both spouses, but it can also reduce the emotional and financial toll of the divorce process.

Conclusion

A high-net-worth divorce that involves the transfer of business assets in a settlement is a complex exercise, but it does not have to destroy the company’s value. If the couple can focus on securing a realistic valuation of the business, explore creative buyout options for the purchase/transfer of the interest owned by one spouse in the company, and prioritize the continued profitability of the business, they can achieve an outcome that is a true win-win. This approach will preserve the value of their hard-earned assets, and also set the stage for the continued success of the business.  The continued vitality of the business may be important if the divorce settlement provides for both spouses to receive financial returns based on the company’s future performance.