Divorce is hard enough when it’s just two spouses dividing assets from a marriage. But when one of the former spouses is a partner in a small business, things can get complicated for the business partner, as well. Here are three ways that a divorce can create ripple effects for a business partner of a person getting a divorce:
- Diluted ownership and control. If your business doesn’t have a buy-sell agreement in place that requires the former spouse of a partner to sell his or her interest in the company back to the partner spouse in the event of the divorce, a partnership of two could become a partnership of three. The former spouse of the original partner could get a voice in the operation of the business as well as a share of the value of the company.
- Reduced profitability. Divorce can take a significant toll on a person’s time, energy and finances. For the business partner of the person getting a divorce, this can mean taking on a greater share of the business responsibilities for a period of time. This can translate into reduced profitability, while one person attempts to do the work that was previously done by two people.
- Potential resentment. Having to take on an increased share of the day-to-day operations of a business while seeing profitability fall can be stressful under any circumstance. But when the reason for the imbalance is one partner’s divorce, this can lead to resentment in the partner who is not getting the divorce. The strain in the partners’ relationship can put further pressure on the business.
Much of the strain involved when one partner in a business gets divorced can be avoided by having comprehensive legal provisions in place in the original business plan. This can include detailed plans for partnership, ownership and shareholder agreements, as well as a buy-sell agreement in case one partner gets a divorce. In the best-case scenario, the spouses of partners going into business together would sign off on such an agreement while their marriages were still working. In practice, however, things do not always go so smoothly. In cases such as these, it’s essential to consult with a lawyer with experience navigating complex divorces involving division of a business.