How Will Divorce Affect My Business? Will I Lose My Livelihood as Well as My Marriage?

By Mary Cushing Doherty, Esq.

Successfully launching and running a business requires commitment and passion. It can be an exhilarating ride; the pride that comes from building something long lasting is hard to top. However, too often the journey never ends, and it can be all-consuming.

business-divorce
How Will Divorce Affect My Business?

Sometimes, despite the best efforts and intentions, the commitment and passion for one’s business can contribute to strains in other aspects of one’s life, leading to a struggling marriage.

When a person who is facing divorce owns a business, or is a co-owner, the question comes up whether the divorce will force the liquidation of the business. In most cases, the simple answer is “no.” That said, a business will likely be considered a marital asset that will be valued as part of the financial analysis in the divorce.

Assets (less liabilities) owned by both or either spouse during the marriage are generally considered part of the marital estate. This includes savings, real estate, debts and business ventures.

Four exceptions to what is considered marital are:

  • Gifts, Bequests and Inheritances: Any gifts/bequests/inheritances one party receives from a third party, which are kept in separate title, are not considered marital assets and are valued as of receipt. The increase in value is marital.
  • Acquired pre-marriage: An asset owned prior to the marriage which is kept in separate title is not considered marital. The increase in value during marriage is marital.
  • Acquired post-separation: Any asset acquired after separation with non-marital funds is not marital.
  • Protected by a prenuptial agreement: All assets acquired before and in some cases during a marriage can be protected by a well-drafted prenuptial agreements.

When looking at a business, if it was started and built during the marriage the business is considered a marital asset. Businesses began before the marriage, have a non-marital value at date of marriage. If the business grows during the marriage, the increase in value is marital.

If a business is identified as a marital asset, or with some marital component, the marital value of the business will need to be determined if a divorce is initiated. The non-owner spouse has the right to know if it is marketable, if the business has significant assets, if it successfully generates excess income to the owner. In some circumstances, however, a business succeeds due to almost entirely upon the personal goodwill of the owner; in such cases, it may have modest value to distribute. In most cases, the courts want the business to survive the divorce as an asset of the owner spouse, especially where the family has been relying on the business to produce income.

It’s unusual for a court to expect marital partners to become partners in a business interest. While the non-business-owner may have a claim to the value of the business, most judges and masters recognize that making an ex-spouse a partner in a business is a recipe for disaster. Instead, the courts will often accommodate a buyout over time of the non-owner’s economic interest in the business rather than trigger financial hardship for the business owner. The court should seek to mitigate financial strain on both parties and any children of the marriage.

If the non-owner spouse works in the business, the owner should be wary of the spouse/former spouse actively hurting the business. A spouse who calls customers or comes to the office and misbehaves may be found at fault for trying to retaliate against the business owner for personal reasons. This could hurt the value of the asset and the source of future income. If the spouse is employed and engaging in this type of behavior, he/she will be terminated.

Compensation generated from the businesses which is in savings is also considered marital property. Investments and retirement savings accumulated through date of separation will be equitably divided. Future child support and alimony will be based on the owner-spouse’s income. Beware: if the business is valued based on excess earnings, the business owner will argue the non-owner spouse cannot double-dip. If the non-owner is getting the value of the excess earnings in equitable distribution, those excess earnings arguably should be removed from income available for support.

The end of a marriage is stressful enough; the fear of potentially losing one’s livelihood at the same time can be frightening. Additionally, an important consideration is the toll of divorce litigation on one’s ability to keep up the same pace of work. The ability of the business to survive the divorce needs to be evaluated by the owner.

The owner will want to have an advocate who is in tune with the range of possible litigation. If the litigation becomes brutal, the non-owner spouse may doom the business, and the goose that lays the golden eggs.

For more information, please contact Mary Cushing Doherty at (610) 275-0700 or by email at mdoherty@highswartz.com. Visit her attorney profile here.

Visit the Family Law page here.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Commercial Lease Agreements: Why You Need A Lawyer

September 24, 2015

By Kevin Cornish, Esq.

Small business owners spend significant time and money preparing to open and operate their businesses.  From market research to obtaining necessary equipment to securing inventory, the tasks are endless.  Small business owners must also secure facilities from which to operate.  Often, this means renting commercial space from a landlord.  Unfortunately, this aspect of operating a small business frequently is not given the appropriate amount of attention.

commercial lease

Here is how the process typically goes: the small business owner spends time researching appropriate locations in which to operate.  When the owner finds a suitable location, the owner inquires with the landlord about availability.  Understandably, owners focus their negotiations around the monthly rental amount and length of the lease agreement.  If the parties agree on these issues, the landlord will often present the business owner with a lease agreement that contains numerous provisions and legal issues over many single spaced pages.  Not wanting to incur additional costs, business owners often spend little time reviewing, negotiating, and understanding all of the terms of the lease agreement that the landlord has provided.

Landlord lease agreements often contain terms that are very favorable to the landlord and not as favorable to the tenant.  Commercial lease agreements also contain provisions that small business owners without legal training may not fully understand.  These issues can include confession of judgment, common area maintenance and how such charges are calculated, which party is responsible for repairs and improvements, legal options for the landlord and tenant in the event of a breach, legal requirements of the parties to act upon a breach, insurance requirements, indemnity and releases, subletting and assignment, acceleration of rent, and many more.

Many issues within a commercial lease agreement may not seem important at the outset of the lease, but could prove costly in the long term.  Frequently, the first time small business owners have an attorney review a lease is after an issue arises.  By that time, with the lease agreement signed, nothing can be done to change the lease terms.  After consulting with an attorney, business owners are surprised at what the lease means or the terms that are included.

While small business owners may not view legal review and negotiation of the lease agreement as an important investment, it can often prove indispensable in the future.  Small businesses can often secure more favorable terms with negotiations prior to signing of the lease.  At a minimum, having an attorney review and explain the lease terms greatly assists the business owner in understanding options and ramifications.

It is true that legal review of a lease agreement is another startup cost for a small business.  However, the benefits of reviewing the lease agreement before signing it are significant and can prevent headaches in the future. And that’s usually money well spent.

For more information feel free to contact Kevin Cornish at (610) 275-0700 or by email at kcornish@highswartz.com. Visit his attorney profile here.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Right of First Refusal – Don’t Take It Lightly

September 9, 2015

By Arnold Heller, Esq.

It is not unusual for a landlord to grant a tenant a right of first refusal to purchase the landlord’s property if the landlord decides to sell. While this may be just the additional incentive needed to persuade a prospective tenant to sign a lease, rights of first refusal are property rights and can become a burden for the landlord/owner.

A “right of first refusal,” or “ROFR,” gives the tenant the right to match an outsider’s offer when the landlord/property owner puts its property up for sale. There are pitfalls that can hamstring landlords, and here are just a few of them that you should watch out for:

Right of First Refusal ROFR

Corporate mergers. Can property burdened by a right of first refusal be included  in the sale or merger of the owner? In one Pennsylvania case (Seven Springs Farm, Inc. v. Croker), the Superior Court decided that shareholders in a cash-out merger were not bound by first refusal rights held by other shareholders, finding that the merger was a corporate act, while the right of first refusal was only a shareholders’ act. This decision was affirmed by the Pennsylvania Supreme Court, but drew sharp criticism from justices on both Courts and pointed up the importance of specifically addressing this potential scenario.

Package deals. Sometimes an owner who has granted a right of first refusal will decide to sell multiple properties at one time, including the burdened property. Often ROFR agreements won’t address this situation, even though it is not particularly unusual.

The Pennsylvania Superior Court has ruled (in Boyd & Mahoney v. Chevron) that as long as the tenant meets the conditions provided in the ROFR, an owner cannot nullify the right by packaging the property for sale together with other assets. In that case, Chevron purchased a gas station, and as part of the deal gave the seller a right of first refusal. Subsequently, Chevron sold the gas station to Cumberland Farms as part of a larger transaction that included real estate across the country. The court ruled that the right of first refusal was a valuable property right that Chevron had to honor by offering the property to the original owner at market value of $158,000. Then the Court went even farther, upholding the trial court’s award of damages against Chevron of more than $500,000! In a more recent case (Hahalyak v. A. Frost, Inc.), the Superior Court applied the same reasoning to prevent a landlord from circumventing the tenant’s right of first refusal by offering a package deal that included the ROFR premises to another tenant, conditioned upon the other tenant’s surrender of its existing space.

Gifts. Property owners will sometimes “gift” property to a friend, loved one, or colleague. If no money changes hands, it would be unreasonable for a party holding a right of first refusal to take advantage of this type of transaction. However, in such a case a new question arises – should the right of first refusal survive the transfer to the new owner? Proper drafting of the ROFR can address this situation.

Exercise of the Right. With a right of first refusal, the tenant gets to make a decision after the landlord has received an offer. The landlord does not want to have to wait too long for the tenant to respond, because it might jeopardize the sale of the property to the outside buyer. For the same reason, the landlord will want the tenant to quickly sign an agreement of sale and post a deposit for the property. While these risks can be mitigated by proper drafting, an alternative approach is to grant the tenant a right of first offer. In this scenario, the landlord/property owner gives the tenant the right to make an offer on the property before the owner takes the property to market. This can also help the landlord determine whether there is a viable market for the property, and alleviate potential snags with the eventual buyer.

For property owners, bestowing a right of first refusal often seems like a harmless way to close a deal and provide a potential exit strategy. But property owners must always remember that without proper attention, giving your tenant a right of first refusal may come back and bite you.

For more information, feel free to contact Arnold Heller at (610) 275-0700 or by email at aheller@highswartz.com. Visit his attorney profile here.

Visit the firm’s Real Estate Law page here.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.