Divorce’s Impact On Small Businesses Can Be ‘Immense’
October 2011 | Article with comments from Andrew Zashin
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When Glenn Phillips went through a contentious divorce, his company unwittingly came along for the ride.
Phillips, the founder of software consulting firm Forte Inc, estimates his divorce cost him more than $200,000 – about a quarter of his annual revenues at the time – in lost potential new business and add-on business to existing clients. He was regularly pulled away from work to meet with lawyers, dig up reams of paperwork called for by his wife’s attorneys, and work out a settlement, a process that took more than a year.
“It was painful, it was costly. And I wasn’t particularly efficient with my team,” said Phillips, who divorced in 2003. “I wasn’t there to lead and direct.”
He ended up settling outside of court and was able to keep complete control of his Birmingham, Alabama-based company. He eventually got the business back on track.
Despite the hardships, Phillips likely got off easy, said experts.
“The economic turmoil of divorce and separation is immense,” said George Cloutier, CEO of American Management Services Inc, a consulting firm aimed at turning around struggling private companies.
Cloutier, whose own business survived his divorce in the 1990s, said the protracted economic downturn has pressured entrepreneurs to spend even more time on the job, often to the detriment of family life. Sometimes they are unaware when trouble is brewing in the marriage.
“Cleary the whole issue of early warning signs is sometimes swept away, especially during the last few years,” he said.
NO FAULT, NO WORRY?
According to the 2009 U.S. Census, there were 9.2 divorces for every 1,000 men and 9.7 divorces for every 1,000 women. Most business owners don’t head into marriage thinking about doomsday scenarios, but when divorce is imminent, small businesses are at significant risk, as leadership and financial resources may be stretched thin.
Are we seeing businesses go under?” said Andrew Zashin
, a Cleveland, Ohio-based divorce attorney whose clientele includes high-net-worth small business owners. “The answer is yes.
There is a bright spot. The availability of so-called “no-fault divorce” throughout the entire U.S. is approaching its one-year anniversary in October, twelve months after the state of New York joined the rest of the country by allowing couples to end marriage without allegations or proof of fault.
No fault divorce sidesteps the often-embarrassing litany of legally recognized grounds. Depending on the state, these claims can range from emotional abuse to adultery – and they can make the divorce process a painful, public spectacle.
“(No fault) advances preserving business because it helps people get divorced amicably,” said Zashin, who over the years has faced bullying from angry spouses, including one man who brought a concealed sword to his law office and threatened him with it. “They can talk.”
Jon Hersh, a Columbus, Ohio-owner of specialty travel and home care businesses, concurs. He and his ex-wife managed to politely hammer out their settlement, saving what he estimated would have been thousands in legal fees as well as unnecessary aggravation.
“We sat down like adults and laid it out,” said Hersh, 41, who divorced in January and retained ownership of his multi-million-dollar businesses, but compromised by paying a higher amount in child support for his son.
“PUTTING OUT FIRES”
Beyond significant differences in state laws, there are many variables that can impact a divorce settlement, including the type of business, ownership structure, spouse’s role in the company, children and when assets were acquired, among many others.
Small businesses owners would do well to take precautionary measures for their companies before they marry, said Charley Moore, founder and chairman of Rocket Lawyer, an online site that helps prepare basic legal documents and offers discounted rates on local attorneys.
“A divorce doesn’t have to spell the end for your small business,” said Moore, a lawyer. “But we like to get people thinking about the issues up front.”
Jeffrey Landers, a financial advisor and president of New York-based Bedrock Divorce Advisors, said most small business owners are unprepared for divorce.
“People just assume it’s not going to happen,” said Landers, whose firm caters to upscale women, including business owners and their spouses. “You’re thinking about profits. You’re putting out fires.”
There is a range of protective measures owners can take prior to marriage, depending on circumstances, Landers said. These include: preparation of a will; a prenuptial agreement; a buy/sell agreement that stipulates what happens to company ownership in the event of certain triggering events; and creation of a domestic asset protection trust, which transfers the shares of a business into a trust that would not be subject to division in a divorce.
Phillips, now 47 and remarried, had no prenuptial agreement or other legal document that might have helped shield his business from the fall-out in his personal life.
“The divorce forced me to reexamine my life and how the business was structured,” said Phillips, who used the event to pare down staff and redefine his niche. “I became more of a delegator.”