Forming a business partnership can help grow and scale a company quickly, offering access to more capital, manpower, and “thought power” for innovation. But did you know that a business partner’s divorce can actually affect your company, too?
Separating one’s personal life from business has always been a given, but even the most professional of business partners can disrupt your company with divorce proceedings. Partnerships are legal agreements, after all. That’s why the prospect of divorce is a critical consideration for anyone forming a business partnership.
A smart business partner will take steps to protect the company through prenuptial agreements and other legal processes. You can also avoid future negative consequences by putting a cash flow management strategy in place.
How Does a Business Partner’s Divorce Impact a Company?
As a rule of thumb, always think ahead. A divorce, whether it’s your business partner or your own, can directly cause financial strain and operational disruption.
Perhaps the biggest concern is the division of assets. Depending on the jurisdiction and legal agreements, a court may even award a portion of the company to an ex-spouse. Such legal decisions could result in major company restructuring or even bringing on an ex-spouse as a decision-maker. These scenarios should give any potential business partner pause.
So, what would a possible timeline look like?
Plan for immediate financial impact. If your business partner didn’t put any legal safeguards in place, the court will conduct a formal valuation of the company. The process is both expensive and time-consuming.
Next, the court will determine if an ex-spouse is entitled to any portion of your company’s valuation. If a court finds in the spouse’s favor, you can offer to buy them out, but buyouts are expensive. Having a cash flow management strategy is essential for staying afloat in this scenario.
There’s also the topic of legal fees, which can drain capital if you find yourself in court. In some cases, a court may even order an asset freeze, which can severely restrict your company’s financial mobility.
Think about what you can do to protect your company from a possible divorce.
Suppose you live in a community property state like Texas. A prenuptial agreement can help prevent future business disruption during a divorce. If you ever consider divorce, seek Tad Law divorce help early to learn how to protect your company through legally-binding divorce agreements.
Audit Your Company’s Legal Agreements
Your first protective strategy is to review all legal agreements related to your business partnership, operations, and buy-sell strategy. Having a reputable legal team by your side from day one can spare you from worst-case scenarios.
Before forming a partnership, a lawyer will let you know that, yes, you can put divorce clauses in your business partnership agreement. These clauses dictate how company interests are managed during a business partner’s divorce.
For instance, a divorce clause could require the partner to offer their shares back to the company before an ex-spouse can claim them in a divorce settlement. These clauses can prevent immediate financial impact, which protects working capital for cash flow management.
Have a Reserve Policy in Place
As your business partner navigates a divorce, you’ll need to shift your cash flow management toward a retention-focused strategy. The goal is to preserve as much company liquidity as possible.
Another important focus is your company’s reserve policy. This is your formal safety net. It outlines a formal plan for covering unexpected costs, like buyouts, while still ensuring future growth. Reserve policies also prevent major budget fluctuations that impact operations, earnings, and stakeholder trust.
A reserve policy also offers transparency to the court overseeing the divorce proceedings. It proves that retained earnings are specifically meant to maintain operations. It’s important to preserve your company’s equity and protect against company distributions being viewed as guaranteed income for alimony support.
Maintain Internal and External Stability
Internal stability is vital during any company challenge. Protective cash flow management and reserve policies ensure uninterrupted payroll and purchasing. A strong company culture built on trust and good financial strategy keeps productivity rates and morale high, even during a buyout.
Planning ahead also prevents any external instability that could affect vendor and investor confidence. Perceived instability can cause some lenders to restrict credit or change payment terms. You can also avoid this reaction by maintaining a good payment track record well before a business partner’s divorce.
Reserve policies help maintain investor confidence through safeguards that preserve equity and production, even during worst-case scenarios.
Protect Your Company’s Interests
Are you doing everything you can to protect the company you built?
Before entering into a business partnership, consider every angle and scenario, especially divorce. Protect your company from the start with excellent legal counsel, divorce clauses, reserve policies, and a strong company culture that ensures internal and external stability.
