“What’s a marital business divorce?” you ask. Just what it sounds like: a business divorce wrapped inside the marital divorce of spouses who hold joint ownership interests in a closely held business entity.
Fighting over kids, money, the house, and the business? Sounds messier and possibly more destructive of business value than an ordinary, non-marital business divorce. But it needn’t be, says attorney Ladd Hirsch in a recent interview for the Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.
Ladd is a partner at the Dallas office of Diamond McCarthy LLP where he focuses his practice on complex business litigation including business divorce, which is how our paths crossed some years ago. Ladd has carved out a niche within a niche, working with family law practitioners in marital divorce cases to optimize value for the soon-to-be-exes who either legally co-own a business or, in community property states, are deemed to co-own a business whose shares are held by one spouse but nonetheless included in the marital estate and subject to division or sale by the family court.
As Ladd explains in the interview, contrary to the conventional wisdom that marital divorce necessitates an immediate, complete separation of interests in co-owned assets, optimizing value in a marital business divorce often means maintaining joint ownership of the business for a period of time post-divorce before transitioning to sole ownership by one spouse or a sale of the business to a third party. The reasons are several and varied, including capturing for both spouses an expectation of business value appreciation; leveraging superior rates of return on business assets; providing more time to market the business for sale to a third-party buyer; and deferring sale until market conditions improve.
Ladd also explains that the decision to maintain joint ownership of the business for an interim period post-divorce requires careful planning and documentation of a comprehensive agreement addressing the host of issues affecting the parties’ rights and obligations concerning corporate governance, operational control, owner compensation, distributions, financial transparency, and the design, timing, pricing, and terms and conditions of a subsequent liquidity event involving a sale of one owner’s interest to the other or the sale of the business. Ladd also talks about a recent tax court decision with a major impact on how to optimally structure such an agreement between divorcing spouses.
The above description provides but a small taste of my interview of Ladd. Even if marital divorce is not your thing, I’m sure you’ll find the conversation engaging and enlightening, so do yourself a favor and give it a listen. And while you’re at it, check out prior episodes of the Business Divorce Roundtable featuring interviews on business divorce topics with leading experts from the worlds of academia, law, and business appraisal.