Of all the difficult questions raised in divorce, and there are many, perhaps none is more emotionally and financially encumbered than questions relating to family businesses. Admittedly there are many different kinds of family businesses. Some are the product of the married couple, with both spouses involved in the creation and operation of the business. Some are created during the marriage but are operated by one spouse. Some have been developed by both spouses, but only one spouse has retained an active interest. And yet others have a long lineage, dating back years or even generations to the creation of the enterprise
Regardless of the actual genesis of the business, a family business is a complicated asset. Not only are there emotional entanglements, but the business is “kind of” a double-edged sword. It is both an asset with a value and also a source of income for the family’s support. To jeopardize the business’s ability to generate money by unaffordable or unmanageable buyouts would be short sighted. To damage the business climate by raising employees’ concerns of the divorce’s impact on the business’ well-being would also be shortsighted.
Questions and concerns are typical.
What is the business worth?
How can we value the asset?
What is each spouse’s share?
How can we structure a buy out or a trade for other assets?
For purposes of this article, we will concentrate on a business in which only one spouse is actively involved. The other spouse is seeking compensation for his or her marital interest in the business. Yet in today’s world, there is a new concern, a looming concern that is giving rise to far different questions and introducing new issues. In the midst of a Pandemic affecting the operation and the fate of many businesses, the larger, greater questions center on whether the business will survive and, if so, what will it look like in a year. In two years? And, more to the point, how do we value its worth, if we have no concrete and reliable conception of its future?
Couples entering mediation during Covid-19 bring with them many unknowns, but the objective of fairly and rationally dealing with the business buyout in irrational times is particularly challenging. However, on the positive side, mediation offers an opportunity for the kind of problem solving that rarely occurs when each party’s advocate is fighting for the best deal for his/her client. Here, in a confidential setting, the couple is encouraged and helped to think beyond the normal buy out deals. Both parties need to think of the best and worse case scenarios.
What, for example, if the business flourishes beyond any one’s expectations?
Or what if the business cannot survive?
Looking at solution strategies from a “what if” prospective, particularly given the uncertainty of today’s climate, allows each spouse to picture the effect of different events on each of them and, by extension, if applicable, on their children. Let us take an example in which the parties had agreed to value the business before the Pandemic. Perhaps now the “buyer” spouse is pulling back, hesitant to commit to a set sum given the present business climate. And, perhaps the recipient spouse does not want to value the business, fearing a deflated valuation. Are there any agreements that might be acceptable to both parties? Consider a few possibilities:
Agree to a timeframe for a delayed valuation based on a buyout formula reflecting the number of years of marriage at the time of divorce as compared to the number of years of business operation at the time of the valuation—Here the spouse who operates the business gets credit for the business’ growth after divorce and the recipient spouse has a smaller ownership interest but hopefully based on increased valuation.
Agree to a trade of assets, with consideration of sharing the upside of both “sets” of holdings if/when the economy improves
Agree to support terms that include provisions for business buyout based on a various scenarios that include the best and worse case scenarios
Agree to wait until an evaluation would be based on a more stable environment, with present terms for how to manage the support needs of the family The suggestion to explore different solution possibilities only serves to illustrate the benefits of using a problem solving approach.
The mediation process offers an environment conducive to collaborative decision-making. It is the experience and skills of the mediator that help couples to consider alternatives, to ponder the impact of different consequences on all family members, to work constructively in structuring a settlement that does not injure an entity or an individual. Nothing is to be gained by an agreement that does harm. Settlements need to deal with present circumstances and future outcomes. Narrow thinking results in agreements that do not stand the test of time.