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Crain’s Chicago Business Features Joe Cordell’s Family Business Survival Guide

Crains-ChicagoCrain’s Chicago Business newspaper, the city’s premier source of business news, interviewed Cordell & Cordell principal partner Joseph Cordell about the significant damage a divorce can do to a business.

In “Family business and divorce: a six-step survival guide,” Mr. Cordell cautioned that for family-owned businesses run by married couples, a poorly handled divorce can be a one-way ticket to bankruptcy court.

Because the value of the business is critical in determining how much a departing spouse receives, it’s best to divorce before you expect a business to really take off, according to Mr. Cordell.

“The best time financially for a guy to consider divorce is not when the business is doing well but when it is doing poorly,” Mr. Cordell said. “When you know your marriage is awful and you’ve just been limping along, the best time to do it is when you can least afford it.”

To learn more ways to protect yourself and your business read the full article, “Family business and divorce: a six-step survival guide.”

 

The effect of a divorce on a business

A divorce will likely affect a business, as the split may lead to a division of assets or could cause an increased level of stress for an owner or executive of a small company if their spouse holds a share of the firm.

Despite a Forbes report that outlined how Kim Kardashian’s divorce may actually help her business, due to the fact that her life will be more exciting as she looks for a new man, non-celebrities may suffer because of a split with their former lover.

In an interview with the National Federation of Independent Business, Alan Schacter, a certified public accountant for Citrin Cooperman, noted that a split can lead to economic problems for individuals if they are not able to remove hostilities with their ex-spouse if an asset division is required.

“You need to put personal differences aside to preserve the asset,” Schacter told the news source. “This is an emotionally charged process. Everyone wants to do it peacefully.”

According to the NFIB, the general rule is splitting business equity “50/50” and each spouse will likely retain an equal share of the assets.

Protecting a business during a divorce

The process of divorcing a spouse can often take more than an emotional toll on the individuals who are involved, as assets can get tied up between the spouses during the split, hurting a business if one exists.

Forbes provided an example with what could happen to a business during a divorce.

According to the news source, if a business is worth $6 million prior to marriage and is worth $12 million following the split, the former spouse of the owner could be entitled to half or more of the $6 million appreciation that occurred while the two individuals were together.

This asset division that favors the former spouse instead of the business owner can be prevented by the use of a marriage contract or a prenuptial agreement.

Forbes reported that a proper contract that is signed at the beginning of a marriage can prevent the $6 million appreciation from going to the spouse who doesn’t have any ownership, as the pre-marital property does retain its character during the marriage due to the right legal documents.

This may be a wise move, considering the divorce rate is 41 percent for first marriages in the U.S., according to Divorcerate.org.

The effect of divorce on small business ownership

Though divorces can be difficult on all involved parties, sometimes the thing that suffers the most is a small business. However, an individual’s company doesn’t have to become entangled in the legal process, according to Reuters.

Glenn Phillips, the founder of software consulting firm Forte Inc., knows all too well the effect that a divorce can have on a business. The innovator estimated that his legal battle cost him more than $200,000 in lost new business and his wife’s attorneys constantly forced him to disrupt business meetings to dig up reams of paperwork, the news source reported.

“The divorce forced me to reexamine my life and how the business was structured,” Phillips told Reuters. “I became more of a delegator.”

Depending on the state in which the divorce occurs, the process can become burdensome for a small business owner. The claims against an individual can hurt their business, and can make the legal battle a painful and public spectacle, according to the news source.

The National Federation of Independent Business reported that an amicable agreement between the two spouses can save a business, and an unbalanced outcome can lead to a dismemberment of the company.

Keeping a small business running after divorce

After a divorce, many things come to an end. Financially, many ties are severed, and this can be devastating to a small business owned by the couple or one of the spouses. According to Reuters, the cost of a divorce and the time away from a business to handle divorce-related issues can easily sink a venture.

In some cases, divorce and small business troubles may be even more interrelated, the news source found. The difficult economy has left many entrepreneurs working long hours to keep their businesses afloat, which can have a negative impact on family life. Additionally, financial struggles can also strain a relationship.

However, a small business does not have to die along with a marriage. A family law attorney told BusinessWeek that business owners must make wise decisions as the divorce proceedings continue. For example, all finances will be an open book, so entrepreneurs must not try to conceal anything financially. These actions could come back to haunt them. Additionally, hiring a financial expert could be beneficial in the long run.

“It’s also important to hire a savvy forensic accountant who can provide in-depth understanding of the applicable law and who has the expertise to testify in court,” the lawyer explained.