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Don’t Get ‘Wigged-Out’ About ‘Nups (Part 1)

Prenups and postnups protect your business

MIAMI — A prenuptial or postnuptial agreement can save your business.

Consider two dry cleaners, Ricky and Fred. Both thought they would be married to their wives until “death do they part.” Unfortunately, they both ended up divorced.

Ricky walked out of divorce court personally and professionally ruined. Fred, while emotionally drained, was able to maintain and grow his successful business.

RICKY

Ricky owned a drycleaning business with Lucy, his wife of 19 years. Ricky was in charge of all aspects of the business, but Lucy did manage the company’s payroll and vendors part-time. For the most part, Lucy raised the children and cared for her elderly parents.

When they decided to divorce, Ricky and Lucy were still civil and wanted their divorce to be amicable. Ricky and Lucy worked together, without lawyers, to craft a plan for sharing time with their teenage sons, and for sharing the family’s expenses. They also agreed to sell their house after their youngest son graduated high school.

After a few months, and at the urging of a well-intentioned friend, Lucy hired a lawyer to write up the couple’s plan. Lucy’s main goal was to make sure the divorce ended fairly for her children.

The lawyer, however, believed that since any small-business owner could hide income, assets, or a company’s true value, then Ricky must be doing that, too.

Even though Lucy had a base of knowledge of the business’ finances, she trusted her lawyer and figured that he knew better. So, she agreed to his “scorched earth” strategy to protect her children.

What is a “scorched earth” strategy? This is a common tactic to squeeze a business owner into a large and early settlement.

The lawyer hires an accountant, and they go after every scrap of information and document pertaining to the company’s assets and liabilities, and they question it all — every argument and angle of attack is fair game.

Much of the cost of providing the information and documents, and defending business decisions, must be paid by the business. Desperate, Ricky “lawyered up,” too.

Unfortunately, Ricky’s law firm couldn’t advise him on the settlement terms proposed by Lucy’s lawyer without conducting its own analysis of the company’s records.

Much of the paperwork involved in operating a drycleaning business was foreign to him, and the stringent environmental regulations and reporting was overwhelming. Ricky’s law firm had to hire its own accountant to help value the business for the divorce.

Ricky and Lucy were now far from civil with one another, and the mud began to fly.

Faced with dueling accountants, complicated and conflicting arguments about the business’ finances and value, and accusations against Ricky of financial wrongdoing, the family court judge appointed an independent forensic accountant to advise the court.

The independent accountant saw that the business, which was the couple’s biggest asset, was crumbling because the ugly divorce was keeping Ricky from focusing on the business. The accountant was also worried about the accusations of financial wrongdoing.

So, on the independent accountant’s recommendation, the court appointed a receiver to operate the drycleaning business. Ricky and Lucy were now paying six different professionals, and trial was still months away.

The receiver discovered that the company’s records did not comply with drycleaning waste disposal regulations, and reported the non-compliance to government authorities. Ricky and Lucy blamed each other for the missing paperwork, and the sour relationship between them stalled and prevented joint efforts at an amnesty program and damage control.

The business began to accrue daily statutory fines, employees were laid off, debts mounted, and the business eventually shut its doors, while Ricky and Lucy continued to fight in court.

A year later, with no business to provide income for Ricky or Lucy, Ricky agreed to settle by paying Lucy more than half of his share of the house. Lucy accepted the offer, even though it was smaller than what she expected originally, because her share of the house was pledged to pay her lawyer’s fees.

Check back Thursday for the conclusion.