Attorney
If you co-own a business, you’ve probably got a buy-sell agreement in place. Because the document specifies what should happen to their share if one of the partners leaves, it’s one of the core legal documents most business owners sign when they get their legal ducks in a row.
Retirement, disability, a falling-out, or death can all trigger the terms of the agreement, but so can a divorce. When a co-owner’s marriage crumbles, a well-structured buy-sell agreement can help smooth the path forward, and ensure that a spouse who never worked in the business does not bring the company to its knees.
Why Divorce Can Put a Business at Risk
New Mexico treats most assets acquired during a marriage as community property, meaning both spouses generally own an equal share. During a divorce, the value of those jointly owned assets may be divided 50/50.
Oftentimes, businesses that were founded or built up during the marriage are classified as community property. When this happens, the value of the business must be divided up, just like any other jointly owned asset.
Many businesses do not have the cash flow or liquidity to buy out an owner at the drop of a hat. So, having an owner’s spouse suddenly demand their fair share can cause problems.
This is often remedied at the negotiating table as the divorcing couple figures out how to untangle their financial lives. Sometimes one will take the family home and a larger share of a joint retirement account, while the business owning spouse retains full control (and the full value of) their business assets or investments. Other times, the spouse who was not involved with the business is happy to receive spousal support (aka alimony) payments for an extended period of time instead of disrupting the business. And in some cases, it can be shown that the business shouldn’t be considered a jointly owned asset at all.
When negotiations fail to produce an acceptable solution, or the business is simply too valuable to offset with the couple’s other assets, the company’s buy-sell agreement comes into play.
The Protection Provided by a Buy-Sell Agreement
Many buy-sell agreements include a provision that prohibits the transfer of ownership interests to someone outside the existing ownership group, including a divorcing owner’s ex-spouse. Some go further, specifying that any ownership interest awarded to a spouse or ex-spouse must be bought out by the remaining partners at a predetermined or formula-based price.
If your agreement has these provisions and was properly executed, it can serve as a strong line of defense. However, family law judges will not hesitate to invalidate an agreement if it appears designed to undervalue a marital asset or strip a spouse of property rights they’d otherwise be entitled to.
What does this look like?
- The valuation formula included in the buy-sell agreement is outdated or artificially low. Many buy-sell agreements peg ownership value to book value or a fixed formula set years ago. If the business has grown significantly since then, a court may look past that formula and order an independent valuation.
- The agreement was signed after marriage. A buy-sell agreement isn’t a post-nuptial marital agreement. Courts can award a spouse 50% of a business interest even when the buy-sell agreement limits transferability.
- The agreement is silent on divorce. Modern buy-sell agreements should include divorce as a triggering event. Some older agreements don’t, and that silence can leave the business exposed.
Serving Families with Dignity & Compassion
If you’re heading toward divorce and your business is your most significant asset, you need an attorney that isn’t going to blink when you bring out your balance sheet. That’s Bob Matteucci. He’s a former business owner with an MBA, whose brush with divorce is what inspired him to go to law school.
Bob knows how important it is that the business stays intact, operations aren’t disrupted, and everyone involved can move forward financially. Contact him today to set up a meeting.