entrepreneurship

Double trouble: When spouses who share a business call it quits

April 9, 2014: 6:28 AM ET

Divorce is never easy. Throw in a jointly-run business and the breakup could get messier. A legal pro offers his best advice.

By Brandon Southward

FORTUNE --  Here's one good reason to heed the old adage about not mixing business with pleasure: When spouses who happen to be business partners--and there are a lot of them; 3.7 million businesses according to most recent U.S. Census data--divorce, the drama and emotion of the situation can sometimes put the business at risk. Charley Moore is founder and executive chairman of San Francisco-based Rocket Lawyer, which provides online legal guidance on matters ranging from prenuptial agreements to incorporating businesses--making him an ideal resource on the subject of business and breakups.  Here are his tips for easing the transition of divorce when business is at stake.

Be rational and compromise

"Divorce is obviously a very emotional thing, and a messy divorce can tarnish the brand and affect relationships with your consumers," Moore says. A high-profile example was the divorce of former L.A. Dodgers owner Frank McCourt and his wife, which further eroded his relationship with the fan base and ultimately led to him selling the team. Before partners wed--or if a businessperson aims to bring his or her fiancee into the business--Moore recommends a thorough prenuptial agreement that includes establishment of separate property, documentation of the business partnership, a succession plan and identifying what the roles each future spouse plays in the company. Moore admits these are hard conversations, but important ones, no different than getting insurance for anything else in your life: "If there is a 50/50 chance you could lose your business in a flood, you buy flood insurance." MORE: Three ways to get better ideas from your diverse team

Hire an independent appraiser

During a divorce, business valuation is one of the first things to happen. When partners are not equal owners or stakeholders in a company, the value of the company and the valuation method used – whether it is based on assets, income, market comparisons and discounts taken – can all be disputed between the parties. Moore argues that hiring an independent appraiser is crucial to avoid a disagreement on the value of the company. "The primary business owner, he or she will argue to lower the value of the business while the non-primary partner will want to raise it," he says.

Know the local law There are two common types of "goodwill" jurisdictions will look at when assessing value: "enterprise" and "personal goodwill." "Personal goodwill is the reputation or patronage of an individual partner in the business (sometimes called a 'book of business') and enterprise goodwill is the reputation of the business as a whole," Moore notes. States vary in how they distinguish between the two types. Some don't make any distinction between the two and allow for both to have a valuation, while many exclude "personal goodwill" but include "enterprise goodwill." The bottom line, Moore says, is to know what legal framework you're working with: "To maximize your results, your attorney and your business appraiser should agree on strategy and valuation methods, while keeping an eye on current cases, evidentiary rules and statutes that could affect the outcome."

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Think about role transition

When spouses have worked together, a divorce will undoubtedly require a changing of the roles in the company. In many cases a spouse may relinquish his or her position as a board member, executive or partner in the company and figuring out a transition is part of the divorce process. "If the spouse has a new role, it's essential to clearly define (and potentially limit) the spouse's decision-making powers in the company, in order to prevent future disputes," Moore says. "Whatever you do, be realistic about the ability to work together in the business." Above all, Moore believes couples going through a divorce must plan the future working relationship very carefully, so as to not disrupt the business.

Be transparent

In many divorce cases, spouses will be less than truthful about the amount of assets they're holding or the worth of their business. Some of the most common methods of hiding assets are paying off fake debts or converting cash into "mobile property" like art, jewelry and hobbies. "Never try to hide assets or do anything out of character, like a sudden surge of spending or changing your business model," Moore warns. "This will send a red flag in court, and you jeopardize your company or face steep fines."

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