What to Do When Your Ex Is Your Business Partner

Personal Finance, Small Business
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What to Do When Your Business Partner is Also Your Ex

 

Kim Leach and her ex-husband were high-school sweethearts. But after 21 years together — 16 of them wedded — a series of rough patches led to their divorce. With two kids, a house that they’d almost paid off and years of accumulated belongings, the split was bound to be painful and time-consuming.

And there was another wrinkle: The couple jointly owned a small business.

There’s no recent research on the exact number of couple-owned businesses, but in 2000, some 3 million of the 22 million U.S. small businesses were managed by couples.

For these couples, divorce throws a wrench into business management. “When dealing with your ex-spouse, it adds an extreme layer of complication to every decision,” says Shawn Leamon, a certified divorce financial analyst.

Leamon helped Nerdwallet identify three common ways joint owners might deal with a business during the divorce process, and when to consider each.

1. The buyout

A buyout, the most common way couples divvy up business assets during a divorce, allows one person to become the sole owner by buying the other’s portion of the business. This can be done either as a “bulk” buyout, using cash reserves or a business loan, or by setting up a payment plan over a certain time period.

Leach took this route, and her husband bought her out of their Oklahoma fitness center. But she was focused on getting custody of her kids and ignored her lawyer’s advice: to have the business appraised and charge interest during the agreed-upon seven-year buyout period.

Instead, she estimated the business’s value at $100,000 and agreed to a $50,000 buyout over seven years with no interest. The business turned out to be worth closer to $200,000 or $250,000.

“Fear overwhelmed me too much,” says Leach, who acknowledges that her conservative approach stemmed from a fear of rocking the boat. “I’m a very confident woman … but when you’re in that situation, everything is an unknown, so you do gamble a little bit.”

Tips

If you can, pay for a neutral appraisal: Business appraisals can be expensive, ranging from a couple thousand dollars to more than $30,000, but Leamon says they’re worth it. It’s easy to under- or overvalue a business, and hiring a neutral party helps ensure a fair deal for everyone.

Consider the future: The longer the payment period, the more likely it is that the spouse who keeps the business will default on payments or shut it down. In her book, “The Little Divorce Survivor’s Handbook,” Leach says that if she could do it over again, she’d negotiate an upfront buyout instead of an installment plan. “You can’t foretell the future,” she says. “You need to plan like this is all you’ve got coming your way.”

2. The compromise

A riskier option involves running the business as usual, with both parties maintaining control of the company. If you and your ex try this tactic, it’s crucial to develop defined business roles and clear expectations.

It might also be a good idea to review your business structure and legal documents to make sure they reflect your position in the company.

In Leamon’s opinion, staying in business together is the least ideal scenario. A financial advisor since 2010, he says he’s never seen this strategy work in the long term.

“You’re getting divorced for a reason,” he says. “When trying to maintain and run a business together, it adds an extraordinary amount of stress.”

Tips

Leave the personal at home: Your relationship with your ex is now strictly business. Work isn’t the time or place to bring around the new boyfriend or girlfriend, or even discuss those new relationships, Leamon says.

Review your legal documents: This is especially important come tax time, when your divorce might impact federal business taxes.

3. The walk away

Divorce is a good time to start fresh in your personal and business lives. If you decide to move on to a new venture, you and your ex can either sell the company to a third party or close up shop.

Selling a business is messier than you might think. It can take time to find a buyer, and the longer the divorce process takes, the more likely it is that something — your relationship, the business, the economy — will take a turn for the worse.

If your company is a franchise, it likely has specific requirements for future owners, which can narrow your candidate field and lengthen the selling process further.

Having a personal connection to the business can also make it hard to sell. So in certain circumstances, shutting down may be the best option. Small businesses often carry a heavy debt load, Leamon says. “Sometimes it’s cleaner to close it than try to dig yourself out of a giant hole.”

Tips

Think beyond cash: You can split profits from a sale 50/50, but your share can also be factored into the overall settlement. Can’t decide who gets the lake house? Consider trading your profit for the vacation home.

Keep it clean: If you decide to close your business, tie up loose ends first. “Business issues, when not properly closed, can haunt you for years,” Leamon says. It’s not as simple as just signing a few documents; you should also review potential issues such as back taxes and lawsuits.

Regardless of the outcome, Leamon stresses the importance of finding a workable agreement. “If you can’t resolve it between your attorneys and you, a judge will decide what ultimately has to happen,” he says. “If you can’t come up with a solution, a solution will be forced on you.”

To navigate the process, try mediation or enlist the help of a divorce advisor to make sure you’re not saddled with an outcome that neither of you desires.

Jackie Zimmermann is a staff writer at NerdWallet, a personal finance website. Email: jzimmermann@nerdwallet.com. Twitter: @jackie_zm.