Divorce Strategy

FAMILY BUSINESS DIVORCE
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divorce strategy

Without a strong family business divorce strategy, the cause and effects of divorce on a family business can be a profound threat to the family and to the business.

Of all the catastrophic events a family business can face, one of the most difficult to deal with is divorce. Divorce in a family business touches everyone in the family. It can also impact non-family executives working for the family's business. We recommend to our family business clients to think beyond just the legal ramifications of divorce - and to develop a comprehensive family business divorce strategy.

Marriages fail - so do family-owned businesses

Research on divorce indicates that about 50% of all marriages in America end in divorce. The statistics on second marriages are even worse.

With family businesses, only about 30% successfully transition from the first generation to the second; about 12% successfully transition to the third generation and only about 3% successfully transition to operating as a fourth generation family business.

Do the causes and effects of divorce influence these statistics? You bet they do!

Can a family business comprehensive divorce strategy mitigate the problems? Absolutely!

Dr. Jane Adams is our Family Business Divorce expert. Dr. Adams is a social psychologist, author of best selling books and a sought after speaker. She has appeared on many of the top TV news and talk shows, including the Oprah Winfrey Show.

"Divorce has financial ramifications in every family business, and emotional ones in every business family. While legal strategies, succession and tax planning can minimize the monetary effects on the business of a marital break-up, anticipating its impact on relationships, morale, and even performance in the workplace is an important consideration, too." - excerpted from Breaking Up Is Hard To Do, an article by Dr. Jane Adams.

Don Schwerzler , founder of the Family Business Institute and an internationally recognized expert on family business dynamics, has been advising and studying family businesses for more than 40 years. "The causes and effects of divorce on the family business are an extremely difficult problem to resolve - much less resolve without emotional and financial turmoil. The cause and effect of divorce is a disaster of varying proportion, for every family-owned business," notes Schwerzler.

How effective are pre-nuptial agreements?

Pre-nuptial agreements will not prevent the causes and effects of divorce - but they can help to minimize some of the legal haggling associated with divorce. However, many business families generally fail to take advantage of the pre-nuptial agreement as a divorce strategy. "Over the past 12-15 years, I doubt I have met a single family business owner who has not heard about the importance of a pre-nuptial agreement - something for themselves or more often, something for their kids. Very few actually use a pre-nuptial agreement, not because they think it is a bad divorce strategy, but because they do not know how to have "that" conversation, prior to a marriage," said Schwerzler.

It is generally recognized that a couple can have an "easy" divorce when there are no children involved and there are not a lot of assets involved. - starter marriages that go bad. But that is not the case if the couple getting the divorce are also business partners. When that is the case, the divorce can become a tangled web that can be costly to resolve, in terms of accounting and legal fees - and may even force the liquidation of the business.

The impact of divorce on a family business is devastating in so many ways it would be difficult to address all of the issues, short and long term. For families in business together, divorce is a disaster. For family businesses, it just makes sense to have a comprehensive divorce strategy.

Family business is generally the largest family asset...

Because the family business is generally the largest asset the family owns, divorce often means that the business will be sold and the proceeds divided between the two people in the divorce action.

Valuation of the family business is part of the family business divorce strategy - and if not handled correctly, can be very contentious.

Brad Davidson is our FAMILY BUSINESS VALUATION expert and the founder of a business valuation firm that has done over 27,000 valuations since the early 90's. Brad's firm has handled thousands of divorce-driven family business valuations.

This is what Brad has to say about developing a family business divorce strategy:

"Having a shared understanding of what a business is worth is key towards resolving a divorce, buy-out or some other conflict situation involving a privately-owned business. The role of a valuation expert is to get all parties to agree on the fair market value of the business. In such cases the appraiser should be impartial and independent of both parties. While the appraiser should seek input from all the key players, the valuation conclusion should be - must be -- the appraiser's alone. It is very important that the appraiser not only be technically competent, but also be willing to act as an educator to insure that, at the end of the valuation process, both sides understand not only what the final number is, but how the appraiser arrived at that number. Only when the parties are "reading from the same sheet of music" will a resolution be achieved that is satisfactory to both sides."

Non-family employees also affected

As family business consultants, when we are working with a family business client that is dealing with divorce, we are confronted with problems and potential problems not only with the family members, but with the non-family employees of the business as well. This is especially common in small to medium sized family businesses where the employees are treated like members of the extended family. Having a divorce strategy just makes a lot of sense.

"What is going to happen to us with the divorce" is a question on everyone's mind. In fact, if allowed to fester, the questions about the future security of the employees can have a horrible impact on sales, productivity, quality and customer service. "And that can be just the tip of the iceberg" says Schwerzler. "The divorce can also be detrimental to the company's relationships with vendors, customers and with the bank". Divorce in a family business impacts the family, the family's business and all of the strategic partnerships that support, depend and interact with the family's business.

"The toughest situation is where both partners in the marriage are both active partners in the business - where family members and employees end up getting involved by taking sides with one partner versus the other partner".

Conclusion

If your family business is dealing with a divorce and/or may be dealing with a divorce, you should consider contacting Dr Jane Adams, our Family Business Divorce expert.

With family business divorce, the problems are profound and can wreck the business and permanently destroy family relationships, far beyond the couple that is divorcing.

Don't take a chance - we can help.





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