Knowledge Base

Series; Business in Divorce - Part 3 When the Business is Owned in Whole or in Part, by One Spouse 

September 1, 2012
Written by Lynne C. Halem

Series; Business in Divorce -Part 3 of 3:  When the Business is Owned, in Whole or in Part, by One Spouse

Those who build their own business have a special proprietary sense of ownership.  Their business is not simply an enterprise with a monetary value; rather it is considered like raising a child.  The business has a personal meaning.  YOU have created this entity; YOU are a reflection of its worth.  Indeed it is YOU!  The business and the owner become inextricably entwined.  Given this sense of personal belonging, it should come as no surprise that business owners find it difficult, even incomprehensible, to conceptualize the division of this asset as part of the marital property pool.  Yet a marital asset it is.  Even businesses acquired prior to the marriage are viewed as marital property, albeit consideration may well be given to compensate “the owner” for the premarital existence of the Business.

In this third and last part of our overview of the family business, we will focus on a business where only one of the marital partners has an involvement.  For all intents and purposes the world views the business as the property of only one of the spouses.

Let us look at David Peterson, DDS.  David is an orthodontist, who married Martha, when he was in dental school. Together they moved from Buffalo where they lived while he was in dental school to Boston, where David enrolled in a post doctoral residency in orthodontics.  All that was long ago, for David has been a practicing orthodontist for 25 years.  His practice has grown from that of a sole practitioner to a group practice in which there are five dentists, all working for David.

Martha, David’s wife of 30 years, also thinks of David’s practice as his “baby.”  She has never worked with, or for David and has no interest in being involved in the practice.  She does, however, believe that David’s professional practice has a value and that she deserves half of it.  David is more than a bit surprised.  Suddenly, he thinks, she has become interested in the practice.  Before, all she did, he continues to think, was to complain about the hours that he worked, the Saturdays that she had to go alone to the kids’ games while he saw patients.  Never understanding that he was working hard, in fact too hard.  Never understanding that he was missing out on his children’s triumphs and, too, wasn’t there when they needed fatherly consolation.  Now, of course when it is all about money, she is right upfront and totally interested in the business, interested in what she can get from it.  David’s lawyer agrees; the business is David’s; he needs its income to provide Martha and the three children with the support she has long taken for granted.  Martha’s lawyer is not worried about David’s providing support, that she takes for granted.  She is worried about how much the business is worth and how and when Martha will  get her fifty percent share.

The lawyers exchanged angry letters; David and Martha exchanged angry words.  After over a year of going no where, with each spouse waving a different appraisal of the practice and each lawyer calling for more and more discovery, David’s best friend, Tim, pointed out to David, and to Martha, individually, of course, that no one was making progress.   “You are going no where at a very slow and expensive rate, aren’t you?”  he asked.  And so, hesitantly and skeptically, the Petersons, at Tim’s suggestion, entered mediation.  What have we to lose, they reasoned.  Miracle of miracles they began to talk, not at each other, but actually to each other.  Mediation provided a forum to tackle all issues, but first and foremost the Petersons elected to discuss David’s dental practice, by far the most sensitive and most charged aspect of the divorce settlement.  David and Martha agreed that the family was dependent upon the continued financial health of the business, that in fact if the flow of revenue from the practice was diverted, no one would benefit.  David maintained that he did not have enough resources to buy out Martha’s interest without borrowing against the Business.  Paying back the Note would, David argued, reduce the amount of money left for family support.  No one disagreed that there was a finite amount of funds available, that was an indisputable fact recognized by Martha and David.

“Fine,” said Martha.  “What do you suggest?  Should I just rollover and allow you to keep the practice that I helped you to build?  Without my taking care of the family, you would never have been able to work the hours you did and you know it.” David nodded.  Of course, Martha played a role in the business’s success.  Another indisputable fact!

“What if,” David posited, “ we shared the value of the business upon its sale.  If you or I die before the sale, the survivor should keep the business or its sale proceeds, maybe even promise to bequeath the funds to the children.”  Martha nodded.  “I think maybe there is a solution in your proposal, although I would need to be kept informed of the business’s income and expenditures. You can not be allowed to “bleed” my asset.’

David’s proposal and Martha’s recognition that there was a real benefit to her in being an equal partner in the business’s value after divorce, albeit with safeguards in place, was the breakthrough needed for the Petersons to mediate all the remaining areas of their settlement.  With new found respect and trust they worked together with the mediator to create an agreement that provided incentives for the practice to flourish and for the family to remain the benefactor of its continued success.

Creative problem solving lies at the heart of crafting an agreement.  What works for one couple obviously may not work for another couple.  The key to settlement lies in each individual’s willingness to explore different ideas and to consider the advantages and disadvantages of taking different paths.  Thinking creatively and expansively requires the mediator to join in the problem solving, helping couples to consider different options and alternatives, both from each one’s and each other’s vantage points.  A workable settlement must work for all parties.

Mediation gave the Petersons a forum to think creatively and the help to think “out of the box” without fear of being stuck with a deal until all parts of the settlement were agreed upon. After all, the whole picture is what really makes a deal, a deal in which all the details are thought through with care and a view of the future, as well as of the present.  Mediation should provide the environment and assistance to tackle what may appear to be insurmountable obstacles and to do so with reason and openness to new ideas.  The final result is a victory for the family who has not been pulled apart by legal wrangling, anger and fear, but, to the contrary, has been the focus of positive thinking. 

Please Call Our Office For Answers To Your Questions - 781.239.1600


Free in-person or telephone consultations available Literature and fees are available upon request.
To schedule an appointment, please call 781-239-1600 or e-mail us at cmdr@cmdronline.com