By Charley Moore
With about 50 percent of marriages ending in divorce, husband-and-wife-owned business teams have to realistically manage both their romantic and their economic relationships. That simply means creating a contingency plan to protect the business, investors and employees, in the event of a divorce, including creating documents such as a prenuptial agreement (if done pre-marriage) and a Buy-Sell Agreement.
Just look at the case of Tory Burch and her former husband, Chris Burch. They built the posh luxury-clothing and accessories line Tory Burch into a company now valued at an estimated $3.25 billion. When the couple split in 2006, Chris remained a majority shareholder in the business and stayed on as co-chair; however, in 2012 things took a turn for the worse when Chris started his own fashion line, C. Wonder, and the legal game of “he-said, she-said” and charges of “copycat” began. It all ended a few weeks ago when Chris sold 28.3 percent of his stake in the company to two investors.
Disruptive legal battles like this might be avoided with the right planning, including a more careful (and realistic) role transition. Here are some tips about the best ways your business can survive a busted marriage.
1. Be rational and consider compromise.
A personal break-up does not have to signal the end of your business. First and foremost, both involved parties need to separate discussions concerning the business from any private and personal property squabbles. Protecting the business—its worth and integrity—should be a top priority. What this means is removing emotional involvement from the situation (as much as possible) and trying to think and act objectively as possible.
2. Hire an independent business appraiser.
As part of the divorce proceedings, one of the first steps is to have your business valued. Remember that it is always worthwhile to hire an independent professional. When you and your partner are not joint owners, agreeing on a value can prove problematic. With the owning partner looking for a low value, and the non-owning partner looking for a high one, the valuation method that is used, whether asset-based, income-based, or market-comparables-based, as well as the discounts taken, can all be a matter of dispute.
3. Know the local law.
Knowing local law is critical. While most jurisdictions will include the value of “enterprise goodwill” in a business appraisal, many will exclude “personal goodwill.” Some states will not even distinguish between the two types of “goodwill” and allow for valuation of both. To maximize your results, your attorney and your business appraiser should agree on strategy and valuation methods, while keeping an eye on current cases, evidentiary rules and statutes that could affect the outcome.
4. Think about role transition.
If the spouses will continue to work together in the business, the divorce will probably require a change in roles. For example, a spouse may no longer work in the enterprise, as a partner, executive or board member. In that case, the replacement of the spouse’s skills and working out a transition of the business role may be part of the divorce process. If the spouse has a new role, it’s essential to clearly define (and potentially limit) the spouse’s decision making powers in the company, in order to prevent future disputes. Whatever you do, be realistic about the ability to work together in the business. Often one spouse will need to step away for the business to continue operating.
5. Be transparent.
Don’t make any big changes to your business during the divorce proceedings, like changing the business model to decrease revenue or appointing a new love interest to your board of directors. You’re more likely to send a big red flag in court, and you could jeopardize your business (and face steep fines if you’re hiding assets). It’s better to be honest and use legal strategies to reach a solution.
Charley Moore is founder and executive chairman of Rocket Lawyer.