When Business Partners Split

     One of the most complex divorce scenarios is that of divorcing business owners. From equal partners to couples with shared interest, a divorce involving a business presents a unique set of questions and challenges for all parties involved.  

Wisconsin attorney Gregg Herman of Loeb & Herman, has seen his share of divorces involving a business. According to Herman, there are a wide variety of issues to address depending upon each couple’s situation.   

In some instances, Herman -- who also serves as chair of family law for the American Bar Association -- said a couple can actually divorce and remain business partners. “There are cases where people do not get along as husband and wife but can get along as co-owners in a business,” Herman said. “In those rare instances, it is important that the parties have employment agreements and shareholders agreements, because if their relationship deteriorates they will have to go through a second divorce.”  

Divorcing co-owners who continue to cooperate on the business end of the spectrum are few and far between; instead, Herman said it is more common for one of the parties to buy the other party out. “To be able to buy out one of the proprietors is not terribly difficult,” he said.  

However, when a buyout occurs, the question of how the other person is going to make money comes into play. “They still have to deal with the support component,” Herman said.  

The question of how the buyout will play out is also of concern. In general, some common buyout options include payments over time or a lump buyout. In some cases, the couple may agree to sell the company at the time of the divorce, or in the future and share the revenue from the sale. “All of those mechanism contain some traps,” Herman said.  



UNEQUAL INTERESTS

While it is ideal for a couple to split a business down the center, that is rarely the case. According to New Jersey-based family law attorney Mark S. Guralnick, divorcing business owners usually share interest with other partners or family members.  

For example, Guralnick said if an individual and his three brothers co-own a business and the individual gets a divorce, his wife can establish an interest in the business. However, the wife can only have a shared interest in the husband’s portion (one-fourth) of the business. “As you can well imagine at the moment of divorce the wife is scrounging to get a clear understanding of the wealth of the business,” Guralnick said. “The husband, who has three brothers – three co-conspirators – has the ability to hide information.”  

Guralnick said he has seen this type of case play out, where the divorcing husband prepped the company and his family/business partners for the upcoming split. Through the help of his family, the man was able to hide the true worth of the company. In the end, the wife hired a savvy lawyer who uncovered the conspiracy. “The moral of story is they have the unique ability to conspire,” Guralnick said.  

In certain circumstances, such as this one, both Guralnick and Gerald Barney, president of California-based AmericanValue Metrics, said a case might require a forensic accountant. “If the spouse has been cheating on taxes and the books are cooked, the appraiser may not be able to tell,” Barney said.   Somewhat of a new breed, a forensic accountant is trained to sniff out inconsistencies and uncover hidden money in the world of accounting, Guralnick said.  

For example, Guralnick recalled a divorce case in which the husband moved money around to hide it from his wife. “This women married a man who had a prenuptial agreement. The prenup said he had $35 million. They had two children along the way. Fourteen years later she filed a divorce because he was cheating on her left and right,” Guralnick said. “Suddenly he had no money. We went to all this trouble and we discovered his business had no value. He had very strategically protected himself by moving his business assets around.” 

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