Family Business in Crisis: Diffusing the Impact of Divorce

Most couples aren’t thinking about divorce as they’re getting married, but for jewelers who don’t prepare for the possibility, a divorce is as much of a crisis for the family business as it is for the family.

Two out of five U.S. marriages (43 percent) end within their first 15 years, say studies by the National Center for Health and the U.S. Census Bureau, while some private studies say a third of all those married will divorce at some point. With over 80 percent of U.S. retail jewelry enterprises family-owned, the possibility and effects of divorce on a business should be of concern to jewelers.

“Divorce is never pleasant, but without preparations, it can also be a significant problem for a family business and its continuance,” says Barbara Draper, director of the Center for Family Business at the University of New Hampshire in Durham, N.H. Here are what experts say should be done to prevent or lessen the impact of a divorce on a family business.

Listen and talk to each other. An ounce of prevention now can avert the heavy impact of a divorce later, say experts. Be aware of danger signs.

One is the desensitizing “tyranny of routine,” says Don Schwerzler, a family-business advisor for 40 years and founder of the Family Business Institute, Atlanta. “Couples get into a rut dealing with the same issues and people week in and out, anesthetizing them to each other’s needs and feelings.”

Another is weaker personal interaction. “Divorce comes from a breakdown in relationships, when people become disconnected from one another,” notes Dr. Tom Davidow, a Brookline, Mass., psychologist and an internationally recognized family-business advisor. “That’s usually due to miscommunication, poor communication, and an inability to talk about differences in meaningful, constructive ways. The family-business component—with its financial and emotional complications—exaggerates those differences and provides even more things to disagree on.”

So, be alert to growing tensions and differences. How do you recognize them? “It’s when you won’t talk about problems for fear things will get worse,” says Davidow. “It’s when you keep things in that annoy you about the other person, until something makes you blow up and he or she says, ‘Why so upset?’ It’s when you lie awake in bed at 2 a.m. worrying—but won’t talk about it with him or her. It’s when you feel trapped, can’t reach out to your spouse, or don’t know what to do.

“Don’t wait until there’s too much anger and hostility,” says Davidow. “Talk about it now with each other. If you don’t make headway, get some help—a counselor, an advisor, a member of clergy—but do it early on.”

Be professional. Family businesses make two mistakes that contribute to tensions leading to divorce. One, says family-business advisor Wayne Rivers, co-founder and president of The Family Business Institute, Raleigh, N.C., is faulty planning. “They don’t plan for their futures, because they’re so busy every day,” he says. “Instead, most do it informally, in casual, impromptu hallway chats or at home over dinner.”

The other mistake, says Schwerzler, is mixing business and home concerns. “They don’t separate or make clear distinctions between family and business, and mix the two,” he says. “Too many always talk business at home, at dinner, and in bed at night.”

Schwerzler has a recommendation for separating family business from home life: “Regularly scheduled formal meetings at work (separate from staff meetings) a couple of times a week, with agendas to review operations, discuss business issues, develop strategies, and make decisions.” He also recommends shutting down and going home after business is finished for the day. “It may take discipline, but don’t bring the work with you,” he says. “Altogether, the amount of home time involved with business will be significantly reduced.”

Rivers also suggests periodic long-range planning meetings outside the store and away from the home, to discuss issues like succession and entry rules for the next generation.

Add a business advisor. Every family business should have an advisor or succession manager, suggests Schwerzler. “This is someone not part of the family or business (i.e., not its accountant or lawyer), who can be objective about what’s best for both and advise on family owner/operators’ ideas without getting emotionally involved.

“It should be someone familiar with family-business dynamics, who can see and prevent conflicts before they start,” he says. It can be a family-business consultant (check the phone book, local colleges, or the Internet for family-business centers); a member of SCORE, the national association of volunteer business counselors (www.score.org); a local businessperson; or “even someone you regularly talk to on the phone who knows the business and family,” says Schwerzler.

“Without proper documents in place and proper arrangements ahead of time, a divorce can paralyze a family business,” says Draper. Here are some suggestions.

Buy-sell agreement. Probably the most important document for closely held corporations and limited partnerships like family jewelry businesses is the buy-sell agreement (also called stock restriction or shareholders’ agreements). A buy-sell protects a business and its continuance from the sale, transfer, or ownership of its shares to anyone outside or no longer involved in it. It gives the business owners/shareholders rights to buy back shares of a withdrawing spouse, shareholder, partner, or heir at a predetermined price. In divorce, it can protect a business from a division of assets. A buy-sell is triggered by specified circumstances, like death or retirement.

“Family businesses are divided between those who don’t have them and those who do,” says Rivers. “And of those who do, only 5 percent have good, well-drafted documents.” A solid buy-sell, say Rivers and other experts, must be endorsed by all shareholders and should include a variety of triggers, especially divorce, bankruptcy, disability, and any proposed sale or gifting of shares.

“Most family-business buy-sell agreements don’t even mention contingencies like divorce,” says Rivers. “They may think it’s a jinx, but these documents must be ready long before you need them. It’s too late when the D-word raises its head and people stop thinking harmoniously.”

Prenuptials. A prenuptial agreement between a couple starting a family business, those marrying into one (either as a member or through a spouse or relative in it), or those owning shares in one (i.e., heirs or relatives) can also protect a business in a divorce, say experts.

A prenuptial (premarital) agreement, or prenup, specifies each spouse’s rights and how property owned by each prior to marriage and individually or jointly during marriage is divided in the event of divorce or death. They’re often difficult to implement, though, because some people assume they imply that a marriage will end in divorce, deny spouses a share in marriage assets, or that a would-be spouse is untrustworthy. Schwerzler makes three recommendations.

First, prenups (like buy-sells) should be company policy for all participating family members, shareholders, and anyone marrying into the business or owning part of it. Children should grow up knowing that. “If formalized as part of the rules of a business, a prenup is more acceptable and understandable,” says Schwerzler.

Second, explain early on to anyone marrying into the family why it’s necessary. “Don’t drop this on a bride or groom a couple of days before the wedding,” Schwerzler says. Include parents of the bride or groom at the informal meeting. “Parents are often the ones most upset about their child signing a prenup,” he adds.

“Explain that everyone involved in your family business signs one, that it isn’t to take away something from anyone but to protect assets of the business. Include your lawyer, to answer any questions,” Schwerzler says. “The more education provided, the easier this goes down—as long as it’s fair in distribution of assets and applies to everyone.”

Third, have attorneys for each review it. “A prenuptial isn’t considered legal unless both sides have attorneys,” notes Schwerzler.

There are other means to prevent or diminish a divorce’s impact on a family business.

Collaborative divorce. This nonadversarial method is quicker, less expensive, less painful, and less damaging to a family business than traditional divorce court proceedings. Clients and lawyers all agree to keep the divorce out of court; negotiate an equitable agreement (voluntarily providing financial documents and using, as needed, professionals like financial planners and family counselors); set rules against uncompromising behavior, demands, or legal actions; and dissolve the marriage peacefully. The idea is spreading; there are even associations of collaborative-divorce lawyers (see the Yellow Pages or an Internet search engine).

“This is much less costly than going to court,” says Davidow. “By agreeing to collaborate, both sides are really saying to each other, ‘I’m committed to working this out despite our differences.’ They’re together in the same room at the same time, getting at emotional issues underlying the practical ones, making it much easier to resolve those practical problems and do what’s best for the business rather than destroy it.”

A current valuation of business. Business valuations (which should be updated every two or three years), and formulas used, are important to divorce negotiations, including use and division of assets. They can be used to find ways, other than breaking up a business, to give a departing partner a fresh start, such as leveraging mortgages or providing security to launch another business.

A trust. Parents can give or set aside business stock for their children to a legal trust, with specifications separating it from a marital estate and, thus, from divorce or creditors’ claims. (It should also limit the beneficiary’s control of the trust or access to it.) Parents can also use a trust to reduce estate taxes in succession of a family business.

Estate equalization. In lieu of giving stock to children not in the business—but whose shares could give them unwanted involvement—an asset of equal value, such as real estate or insurance, can be provided.

Married couples in business and their families aren’t the only ones affected by a divorce; so are employees. “People caught up in their own dilemma often fail to see how it affects others,” says Rivers. “In a small store, with five to 10 employees, the tensions and uncertainties created have serious effects on staff morale. It’s a cancer on business operations.”

“The employees don’t know what to do,” agrees Davidow. “They wonder, To whom do I owe my loyalty? What’s going to happen to the store? Will I lose my job? Should I stay? It’s a stressful and anxious time, especially for longtime employees.”

So, say experts, call everyone together as soon as it’s feasible and update them as needed. Don’t detail your personal problems, but say, “We’re going through a difficult time and trying to work this out.” Then tell them the most important thing they want to know: The business will continue. “You may not know who will own and run it, but you need to tell them it will continue in some form,” says Davidow.

It’s also important to have in place, long before any problems start, a well-trained “No. 2”—a general or assistant manager who can run the store when the owner is absent, says Rivers. “That person’s role becomes even more important when a couple is in counseling or divorce proceedings and away for long periods.”

When a divorce is final, provide a chance for staff to say farewell, says Davidow. “Give the person leaving and the employees an opportunity to say goodbye to each other. This provides closure for both sides, especially those who have worked closely together for a long time.”