Divided We Stand

When Complications Arise...

Not completing a buyout can be disastrous, too. In some states, Friedman says, a judge weighs the relative contributions of each spouse and awards unequal shares of the business--say, 60 percent to one and 40 percent to the other. That makes the latter a minority shareholder, with a sizable investment in the business but no say in management and no ready market for the stock.

Often, contested divorces take several years to settle. That can put everything regarding the business on hold at a time when the owners may need to make major business decisions, Wistner notes. Suppose the divorce court issues a restraining order to keep the owners from selling the business until the divorce is final. An opportunity might come along to sell the company at a premium price, but the owners' hands are tied until the opportunity is long gone. Then both parties have lost out.

A divorce can also lead to unexpected expenses for the business while it's still reeling from the cost of buying stock from an ex-spouse and perhaps paying spousal support from its income. Suppose the husband was the primary business manager while the wife did the books and answered phones. Most likely she performed these services free of charge to help build the family business. "Typically, the spouse who gets the business will have to hire someone to do all that--[and that person] won't do it for free," Herman says.

At the same time, Wistner notes, the corporation might be getting a tax deduction by paying for the owners' house, utilities and vehicles. If the wife was drawing a salary, that's tax deductible, too. "When the owners divorce, all that ends," he says. "The husband loses all those tax deductions, and the sweetheart deal on the home front is over." Accordingly, personal expenses increase not only from the cost of setting up two households but from expenses formerly covered by the business.

When the business has additional partners--say, several brothers--things get even more complicated. A judge can order only the divorcing owner's share to be divided, not the share belonging to the other partners. But having to come up with the cash to buy out the owner's ex-spouse can strain relationships within the partnership.

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This article was originally published in the May 1998 print edition of Entrepreneur with the headline: Divided We Stand.

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