By Laurie Israel, Esq. and R. Paul Faxon, Esq.
The “new” job market and divorce.
Businesses owned and primarily operated by a small number of partners (“closely held businesses”) have become a more significant segment of the economic landscape nationally and in Massachusetts during the past decade. Many people now start their own businesses in order to earn livelihoods and avoid future unemployment or as a reaction to being the victim of downsizing. This is a protective reaction to the recession, coupled with high unemployment and underemployment rates. In addition, the internet fuels the ability to work at home (or primarily at home) and reach a broad market with a limited outlay of financial resources. Lastly, more active participation by both spouses in child care and rearing has changed the types of livelihoods that many couples have developed.
Many people now make their own jobs and reinvest in their own business. Some of our divorcing clients have internet businesses, such as e-commerce (mail order) and informational sites. Many of our clients have independent consulting businesses. Others have retail businesses, small farming operations, or engage in food production (including retail and wholesale) and food service. Some of our divorcing clients have made ownership and management of real estate (multi-family and/or commercial) their family’s livelihood.
Many of these family businesses are owned and operated by both spouses. In these cases, each spouse is often engaged in a different role in the business. Some families provide livelihoods through more than one business. Sometimes the closely-held business is operated by one of the spouses. In many cases these businesses represent the couple’s greatest financial asset. When divorce occurs, providing livelihoods for themselves and their families through their business becomes a mutual and challenging task of our divorce clients.
Many divorces are resolved through consensual, out-of-court resolutions.
Most divorce cases ultimately resolve by agreement, either before or after the start of litigation. The mega-cases that only a judge decides in litigation make the news but constitute the exception. The Jamie and Frank McCourt case over the ownership of the Los Angeles Dodgers major league baseball team serves as a cautionary example of what happens when divorce litigation runs amuck and the spouses forfeit the opportunity to craft the terms of their divorce by abdicating that responsibility to a judge.
Many divorcing spouses negotiate the key terms of settlement, either indirectly through their attorneys, or by active involvement in some type of consensual alternative dispute resolution process, such as mediation or collaborative law. Even for other divorce cases which start with the filing of a divorce action, it is estimated that at least 95% of such cases end with a divorce settlement and not with a Court decision.
Our typical divorce clients are not mega-clients like Frank and Jamie McCourt with their on-going dispute over ownership and control of a valuable professional sports franchise. However, like the McCourts, our clients can find themselves enmeshed in a family business that provides the family’s livelihood. They wish to separate their livelihood and move on with separate lives. Like continuing to live together after a divorce, working together after a divorce is rarely a sought-after goal.
Re-structuring a business fairly in divorce without losing key clients and employees, i.e. destroying its economic value, becomes challenging. The adversarial (litigation) process fails to deal effectively and efficiently with this challenge because it focuses on “what someone wants”, “positions” and “the blame game” rather than individual and collective interests. Tapping into the unique knowledge of the business each spouse possesses and “what can be done so that both parties get as much of what they want as is possible” are good and helpful planning tools in a divorce. That is the difference between litigation, and future-oriented consensual problem-solving.
A litigating couple can hire dueling business valuation experts, financial advisors and transactional attorneys. As we well know, this often leads to disparate valuations, financial analysis and business law advice that cannot be reconciled. What results is more conflict, more intractable positions, a costly “battle of the experts” and further litigation. During the litigation, the couples’ feelings towards each other harden (because they are essentially in war). This makes it more difficult to work together in the business, and maintain its value and the income it generates.
How a neutral transactional attorney can help in a consensual divorce.
Spouses owning a business who are in a consensual divorce process need to seriously consider jointly engaging a neutral transactional attorney to assist them (and their respective divorce attorneys) in efficiently identifying applicable business law issues and opportunities as well as recommending options. This jointly retained attorney, with an engagement limited to these services and reporting simultaneously to both spouses and their family attorneys, can best maximize the post-divorce livelihood possibilities for both spouses. This same attorney could take the lead in drafting a balanced set of documentation to implement the restructuring and sale of the couple’s business. Ideally, a jointly retained financial expert would also make a contribution to this process.
Transactional attorneys are well-versed in the problems and pitfalls of control of closely-held businesses. They can identify business lines and/or clients that could be spun off into a new business that each of the spouses could own and operate separately after the divorce. If separating a business into two (or more) business or asset types is not possible, the transactional attorney can help formulate alternative solutions.
If the spousal business has both a “business” and a real estate component, the transactional attorney can advise on how best to separate them. The advice will include how to equalize the value of each, with equitable buy-out terms and mechanics.
If only one spouse will remain in the business, the transactional attorney can propose a reasonable buy-out procedure. This could take the form of a sale of the entire business to one spouse, with a portion of the sales price being paid out over time with secured or unsecured seller financing complete with certain operating covenants and with perhaps a portion of the “earn out” sales price tied into future firm revenues. The payment plan should be feasible for the spouse remaining in the business, while giving the other spouse a realistic and fair economic reward and roadmap to move forward after the divorce. The goal is to provide a fair result for each of the spouses while maximizing the value of the business enterprise. This type of work is often best done by a neutral transactional lawyer, not by the parties’ divorce lawyers.
A judge is ill equipped to perform all these functions in divorce litigation. It is beyond the scope of what a judge can or should do. And as financially knowledgeable as many divorce attorneys are, transactional business law is not their specialty. Divorce attorneys should welcome working with a transaction attorney neutral on their clients’ divorce. It will help the divorce attorneys do their jobs better, involve the clients in actively crafting the restructuring of the business and provide better service to their clients.
And since the transactional attorney is engaged by both of the divorcing clients, he or she is a neutral advisor. That makes the transactional attorney’s input more acceptable to both of the spouses and can make the McCourt situation much less likely.
About the authors:
Laurie Israel is a active mediator and collaborative lawyer in Massachusetts. She is a former board member of the Massachusetts Council on Family Mediation and the Massachusetts Collaborative Law Council. Laurie currently writes for The Huffington Post as a blogger on divorce-related topics, and is managing partner of Israel, Van Kooy & Days, LLC.
R. Paul Faxon is a transactional attorney, concentrating in closely held business law and commercial real estate, as well as a mediator and collaborative practitioner. He is a past board member and former president of the Massachusetts Collaborative Law Council