I was 27 and struggling with my first start-up when I met my wife. She seemed like the perfect addition to my growing company. She worked without pay and never complained when the job kept me at the office until midnight – because she was there too.
I told this story to Charley Moore, CEO and founder of Rocket Lawyer today, and we lamented how terribly shortsighted that was. We talked about how married entrepreneurs end up destroying their marriage and their business through divorce.
As Charley puts it, “romance and finance are a dangerous mixture.” No entrepreneur in his right mind would go into a business where 50% of the time they’ll lose 50% of everything they own. “But those are the facts of marriage in the USA,” he says. Entrepreneurs who mix love and business are adding the risk of divorce to the risk of business ownership. It’s a dangerous combination.
Want Proof? Just ask Tory and Chris Burch, who divorced in 2006, but fought over the $3 billion Tory Burch clothing brand for almost seven years. Or Don and Glenda Hachenberger, whose divorce put two 150-year old brands, Park Seed and Jackson & Perkins, into Chapter 11 bankruptcy.
Marriage is a Contract
A better recipe for mixing love and money is simple: Agree in advance. Before getting married, every couple should find time to talk about money, he says. And if the two of you are building a business together, that discussion should include a way to protect the business from problems caused by the marriage.
Charley says couples should sign a buy-sell contract for their business partnership and a prenuptial contract for their domestic partnership. “A buy-sell could have really served the Burch’s well,” he says. Since a buy-sell agreement sets the terms by which two owners can end their working partnership (without ending the business), it can save millions of dollars and countless headaches during any kind of split-up.
More important, a prenuptial contract and a buy-sell agreement can save the business. Far too often a messy divorce dooms a business to failure. In that case, everyone loses: spouses, owners, employees, vendors — the divorce can wipe them all out. A prenup and/or a buy-sell can be a simple and efficient insurance policy against this.
When Love is Not Enough
The health of the business is so important that even when the end is nigh, keeping the company going should be everyone’s first priority. So when a buy-sell is not enough, and your joint-venture is headed for splits-ville, follow Charley Moore’s 5 Rules for Entrepreneurial Divorce:
- Be Rational and Consider Compromise
Divorce brings out the worst in people. To assure your business continuity however, you must separate your emotion from all financial discussions “Protecting the worth and integrity of the business has to be your top priority.” When your spouse is part of that business, don’t use the divorce settlement as punishment — focus on preserving the company, even if it is not yours.
- Hire an Independent Appraiser
The business may well be the largest asset the two of you have — and the one most likely to cause squabbles at the divorce table. Make sure that everyone understands the true value of the business, how it was valued, and what drives that valuation.
- Know the Local Law
There are a lot of legal nuances that will affect a business valuation in a divorce settlement, and each state has a slightly different rules. Some states will exclude the value of “personal good will”, for example. Be sure your spouse, both divorce attorneys and the appraiser all agree on the process and outcome of the appraisal.
- Plan the Transition
If you’re both working in the business, consider how it will operate after you’re divorced. If one spouse leaves, it will be critical to replace his or her skills. Put the business first and think about this up front.
- Be Transparent
The instinct is to try to hide assets when you’re getting divorced. Do the opposite. Don’t appoint your new lover to the board. Don’t change the business model to try to decrease revenue. Don’t be tricky … be fair, forthcoming and above all, kind.
Being prepared is one thing, but there’s no reason to dwell on divorce. Working with a spouse does not have to end in a mud fight or a corporate bankruptcy. After all, 50% of marriages endure.
In fact, there are plenty of entrepreneurs who will tell you that working with your spouse builds trust, respect and love… I know, because that’s what I would tell you. Tracey and I have built not just one company together, but several. And on this, our 17th Valentine’s Day together, I know that building a business together also helped us build a stronger, better marriage.
Dedicated to your (domestic bliss and) profits, David