Family Business: Divorce, How To Manage It!
By Arnold AITKEN and Stephen BRAY 'The Family Business School'

Divorce is one of the most catastrophic events that can affect a family business. It not only affects the couple that decided to part ways, but usually affects every member of the family. In fact, it can even have some profound effects on non-family members who are deeply involved in the business and who deal with the divorced couple in day-to-day situations.

There is no denying the fact that divorce in a family business can pose a major threat to the company, especially if the husband and wife are both senior executives and, worse, if one of them is the CEO. Statistics even bear this out. According to the latest studies, about half of all marriages in the US end in divorce. For second marriages, the divorce rate is much higher than that.

In many divorces, the courts favor the wife. We read the horror stories daily about women being awarded a hefty alimony, more than half of all the assets, custody of all the children and even the family dog. Since the family business is usually the largest family asset, then, unless the wife was also originally both the CEO and main entrepreneurial mover, the family might as well kiss their business goodbye. Having a divorced couple jointly running the business is extremely rare simply because it seldom works.

Where a CEO is appointed from a capable individual who has joined the family business as the result of marrying one of the founding families' children, the effect of a divorce is equally destructive.

It may be that the family business if felt in some way to have been responsible for the destruction of the marriage. The CEO perhaps spent too much time 'married' to the company, rather than as spending time with his wife and children. In such cases the wife may use her shares, and influence, not only to attempt to evict the ex-spouse from his job, but also to reap revenge upon the family business which she perceives as the rival to her marriage.

How can a family business effectively protect itself from the ill effects of a divorce? Beyond the legal consequences of divorce, a family business should put in place a comprehensive divorce strategy

The divorce strategy should address the legal issues of the divorce and stipulate strategies with regard to succession and tax planning. This can greatly ease the monetary effects of a divorce on the family business.

The divorce strategy should consider the company’s employees and anticipate the impact of the break-up on their morale and working relationships, an area that can experience much turmoil in instances of divorce. The worse thing that can happen is for employees to take sides because that can take a terrible toll on the business, especially if the divorce is antagonistic.

In most cases, the most important question in the minds of employees is “what happens to us now?” The family business should make an effort to clarify this and ensure that morale remains strong and the business continues to function efficiently.

The divorce strategy should also address how the divorce affects the relationships of the family business with its key clients, suppliers and banks.

On the financial side, any comprehensive divorce strategy should propose a pre-nuptial agreement early on. It is a touchy subject, but a pre-nuptial agreement is still one of the most effective ways to save the family business from the destructive legal haggling that often accompanies a divorce.

Ultimately, the divorce strategy should also take into account one of the most difficult divorce scenarios to affect the family business -- when both husband and wife are partners in the business and their children hold sensitive positions in the company. These are the types of divorce that can only be resolved at great cost, both emotional and financial, especially when it comes to legal and accounting fees. In many divorces of this nature, the family business was forced to liquidate and close shop. Hence, the role of a comprehensive divorce strategy in this regard is vital.

In addition, the divorce strategy should also cover how the principals decide on the valuation of the family business because this is one of the most contentious areas of any divorce. Oftentimes, a valuation expert must be brought in to appraise the business in an impartial manner, free from in-put from husband and wife. The appraiser must also be capable of explaining to both parties how he reached his final number. His role is crucial in getting both parties to agree on the company’s fair market value.

In the final analysis, the best way a family business can cope with a divorce is to plan for it – by creating a comprehensive divorce strategy. Even then, the problems of divorce may be so profound that they destroy the family business.

Whilst lawyers and accountants are perhaps the first professionals you might think of when the owners of a family business are divorcing, and some are very helpful, you may also want to consider an appraisal from a family business consultant.

Many family business consultants are trained not only to understand your business, they also know about helping people to reunite, or part amicably. Some even have clinical experience working in hospitals, or other helping institutions.