Law
Divorce in a Family Business
July 21, 2009
Divorce is arguably one of the most caustic events that can happen to a family business. As if the breakup of a marriage on its own isn't bad enough, add to that the demise of what was probably the family's largest asset and financial future, and the situation erupts. Sweat equity aside, emotions run high when dreams — and families — are broken.
"Family businesses tend to work great when things are good, and they can usually survive hard times. But when you add a divorce to the mix, you often lose the cushion the family provided," said attorney Linda Balisle, Co-Founder and Shareholder at Balisle & Roberson in Madison, Wisconsin. "There is a lot of advice out there about succession planning and death, but not divorce [in a family business]."
Deb Houden, Director of the University of Wisconsin Family Business Center, said divorce in a family business can also be very difficult for a family member who is not involved in the family business. Not only is one person divorcing a brother, sister, daughter, or son, she explained, but they're threatening the business. "And that's a double-hit." Rather than being an in-law, she said, that person becomes an "out-law."
With 50 percent of marriages ending in divorce, and second-marriages suffering a worse fate (nearly 60 percent), the longevity of a family business is risky at best. Divorce aside, consider these facts: Only 30 percent of family businesses make it to a second generation. Of those, about 12 percent move to the third generation, and after that, just three percent of businesses survive into the fourth generation and beyond.
Then there's the economy. Its untimely and overlong grasp is having unprecedented affects on marriages already on the rocks. "People can't use the banks the way they once did, which prevents potential buyouts and access to funds," said Balisle, who regularly deals with divorces involving family businesses. Tough situations have suddenly become even tougher. "The world didn't completely change until last fall," Balisle said. "Then, we started seeing valuations drop so much. Appraisers are having a hard time getting valuations that will allow banks to refinance mortgages, because there are no comparable sales. Banks are under more scrutiny so they need the appraisals to support any loans given. Using comps from two years ago just won't help."
In this struggling economy, Balisle has witnessed business people, some with six-figure salaries, losing their jobs and being forced to foreclose on their homes. In some cases, their children, some attending high-dollar universities, are being transferred to less expensive alternatives. "There is a ripple effect in the upper middle class and upper class which has historically felt insulated. Nobody is immune."
Balisle said she has noticed some trends due to the economy: In some cases, the flames of already-tenuous marital situations are being fanned by economic woes, making matters more contentious. In other cases, couples are putting off the divorce process because they simply can't afford the expense.
[In Business attempted to speak anonymously to business owners currently mired in divorce proceedings, but all declined. "It's too new," Balisle said. "They're just too private."]
A collaborative solution?
Couples heading toward divorce may want to consider a less contentious alternative: Collaborative Divorce, according to family law attorney Steven Bach, Senior Partner at Cullen, Weston, Pines and Bach in Madison, Wisconsin. In a collaborative divorce, the divorcing couple agrees — in writing — to work cooperatively, together with their collaborative attorneys and experts, to find solutions that both parties will agree to without the threat of litigation. It brings all four parties, face-to-face, to the table over a series of planned meetings, where all financials are disclosed and terms are worked through in what everyone agrees will be a respectful process. Issues are worked out directly, and in good faith, rather than through a series of written communications between attorneys. With everyone's cooperation, the process might even be resolved more quickly than a traditional divorce proceeding. In the end, when all parties have agreed on all issues, a written document is filed with the court and the parties proceed to an uncontested final court hearing. There, the court approves the document and grants the judgment.
"The entire objective is to reach creative solutions and find win-win situations," said Bach. And when a family business is involved, he said it helps to work collaboratively, especially when the splitting of assets could be economically devastating to the business. Sometimes that means couples must ask themselves whether it would be possible to remain involved in the business — despite the divorce — in order to preserve the economic entity. "The collaborative process opens up very different opportunities, rather than an all or nothing process," he said. "but it's not for everyone."
Not just for marriages anymore.
Bach, who has been involved with the Collaborative Family Law Council of Wisconsin, Inc. since its inception, said attorneys are being trained as Collaborators all the time. But it's difficult, he admitted, "because attorneys must change their way of thinking and how they approach things." Still, he maintains that because collaborative divorces are proving successful and gaining in popularity, the method is also being applied to non-divorce situations, such as in contract disputes or business break-ups. The benefit of the process, he said, is that "people aren't forced into something, and those involved are more likely to live up to the agreement."
While a collaborative divorce does not guarantee that a case will be settled out of court, it motivates all parties to work hard towards a solution, especially because collaborative attorneys are not allowed to represent their clients in court. So, if a solution is not possible, new lawyers must be hired in order to move the case to the next phase.
Bach said about a third of his divorce cases have used or are using the collaborative process. "I'm a big fan," he said. "Everyone gets in the room and works things out. Everything is brought to the table, so there are some efficiencies. And in terms of assembling a case collaboratively versus going to court, you might even expect substantial savings."
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