Meet Your New Partner: Your Partner's Ex-Spouse's Boyfriend
Cliff Ennico
www.creators.com
#147;A partner and I have been running a small service business for the past five years. I have known for some time that my partner#146;s marriage was in trouble, but apparently he just discovered his wife has had a boyfriend for a long, long time. Divorce proceedings have begun. While my partner and I get along very well, I#146;m really concerned that my partner#146;s wife will get a piece of our business, and that we#146;ll have to deal not only with her but the boyfriend as well. Is there anything we can do to prevent them from getting a piece of our business, short of buying my partner out entirely?#148;
Most business owners know that if you have partners, it#146;s a good idea to have your attorney prepare a #147;Buy-Sell Agreement#148; that will protect you, and the business, in the event one of you dies, becomes disabled, or makes an #147;involuntary transfer#148; of their ownership interest in the business (such as a bankruptcy filing). The trouble is that many Buy-Sell Agreement forms attorneys use are out of date, and don#146;t provide for a solution in the event a partner becomes divorced and his ex-spouse is awarded a piece of the business as part of the divorce settlement. Under modern divorce law, where judges have tremendous power to divide assets any way they wish to achieve a fair and equitable settlement, there#146;s a good chance your partner#146;s wife could be awarded a piece of your business if you and your partner don#146;t take action now.
Dodie Theune, a Senior Vice President of the Bryn Mawr Trust Company in Bryn Mawr, Pennsylvania (
dtheune@bmtc.com
), says there#146;s a ray of hope in this situation. #147;When there#146;s a divorce, the lawyers go through a laundry list of every asset the couple has, and a lot of horse-trading goes on,#148; Theune explains, adding #147;the one asset nobody wants to get in the divorce is one-half, or in this case one-quarter, of a business they don#146;t know anything about.#148; So the first thing your partner should do is offer to give his spouse the beach house or the stock portfolio in exchange for whatever piece of your business the divorce court would otherwise give her. If the assets are worth roughly the same as your partner#146;s interest in the business, and the spouse clearly wants them more than the business, there#146;s an excellent chance the divorce court will bless the #147;swap#148; and you can go on with business as usual.
But what if there is no beach house or stock portfolio, and your partner#146;s interest in the business is the biggest asset worth going after?
In that case, Theune believes, you have to step in and work the situation out with your partner. #147;Perhaps the two partners can look to the business for some assets that can be offered to the spouse instead of an interest in the business,#148; suggests Theune. The business would loan these assets to the divorcing partner, who would then pay back the loan with interest (make sure the divorcing partner signs a legal #147;promissory note#148; or IOU promising to pay the loan back).
If the business is cash-poor, you and your partner could take out a loan in order to free up some funds to pay off the spouse. In that case, Theune advises that the two of you sign a #147;side agreement#148; that the divorcing partner will be responsible for paying off the loan out of his share of the business profits.
Obviously, the best time to deal with this situation is well before a partner begins divorce proceedings. In any partnership, all partners need to be candid with each other about how strong (or weak) their marriages are, and whether or not they have enough assets of their own to deal with a divorce, separation or any marital nastiness. If they don#146;t, then maybe they shouldn#146;t be a partner in the business. Don#146;t wait for the divorce to happen #150; buy your partner out now for fair market value, and make him or her an employee going forward. A divorcing employee#146;s spouse can attach his or her wages (maybe), but they can#146;t claim an ownership interest the employee doesn#146;t have.
You could have a financially weak partner sign an agreement allowing the other partners to buy his stake out in the event of divorce, but divorce courts in many states will look at these agreements with a magnifying glass to make sure they don#146;t cheat the partner#146;s spouse out of a fair settlement.
As Theune points out, #147;when you deal with partners, you want to know that they have enough money so that no matter what happens in their personal lives, the business will not go on the chopping block.#148; If they don#146;t, then they shouldn#146;t be partners. Period.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.
