‘Til Business Do Us Part
How to ensure your joint business outlives a failing marriage
By Alexander D. Nirenstein
Divorce can be a trying time for individuals faced with income, property and child custody issues, but throw in a joint business venture, and the formula could be detrimental to both couple and business. The phenomena of newlywed couples seeking an instant satisfying and established lifestyle has led many to open up their own business, where profits can be quick and hours are flexible. Couples in their mid-40s and 50s are also embracing joint business ventures, finally opening that family business they have spoken about for years.
While this combination of business and pleasure can be a success story for both a marriage and a business, it can also be the recipe for disaster. Arizona boasts one of the highest divorce rates in the nation—about 64 percent of all marriages in Arizona and 75 percent of all marriages in Maricopa County end in divorce (according to the Committee on Human Resources for the Arizona House of Representatives and the U.S. Census Bureau). And the Valley’s most successful CEOs and prominent figures are not immune to the effects a failed marriage can have on a thriving business. Having represented some of the Southwest’s most high-profile figures in family law cases, I have seen first hand that even the elite are not immune to blindly entering into the sanctity of a joint business, without proper legal preparation and agreements.
The No. 1 thing I tell my clients, family and friends who are considering entering into joint business rights or assets is to draft a solid shareholder’s agreement with a buyout provision to protect you, your spouse and the business. This can be in a prenuptial agreement or a separate agreement, but it’s a must. Without this, it can be a free-for-all if you divorce or if one of the parties wants out of the business during a separation.
You also have to be familiar with state divorce and community property laws. As I am often faced with clients who have not taken proper legal protection, Arizona’s community property law never fails to be one of the most shocking divorce provisions to couples. Under this law, regardless of which partner in the marriage is primarily running the business on a daily basis, both parties are entitled to equitable shares of the business. This means the stay-at-home mom can be found to have contributed as much to the business as her CEO husband who puts 60 hours a week into the company. Thus, each party will usually get 50 percent of the business.
For couples who have been fortunate enough to properly prepare their business for this scenario, dealing with the buyout provision before the divorce is also a smart move as court rulings in divorce cases can impact the share each party has in the business. Additionally, contested divorces can also take years to settle, creating huge setbacks for a business’ growth and success, and creating roadblocks to selling the company should an attractive offer come along.
Bottom line? Putting your head where your heart is could save you and your business. If you are in the middle of a business divorce or on the brink of one, ensure you get all your ducks in a row beforehand. Have your financial planner, CPA and business lawyer collaborate through initial negotiations. This will ensure all parties representing you and your business will be on the same page regarding your personal, financial and business interest.
Alexander D. Nirenstein is a managing partner and co-founder of Nirenstein Ruotolo Group (NRG Family Law), a boutique family law firm with offices in Scottsdale and Tempe.