By Lyzz Leise
Valentine’s Day is behind us, but relationships, including business relationships, do not stop being important once the holiday passes. On this post-Valentine’s Day Tuesday Tax Take, we are looking at what happens when personal relationships break down and the effects spill over into business ownership.
Divorce is rarely something business owners plan for, yet it can have serious consequences not only for the divorcing spouses, but also for business partners who are not involved in the marriage at all. One of the most disruptive outcomes occurs when a divorce results in an ownership interest being transferred to a former spouse. Without proper planning, business partners can suddenly find themselves in business with someone they never chose. This is where buy-sell agreements play a critical role. A well-drafted buy-sell agreement can treat divorce as a triggering event and help keep ownership within the intended group while providing a fair outcome for everyone involved.
How Divorce Can Affect Business Ownership
In many states, an ownership interest in a business may be considered marital property, at least in part, if it was acquired or grew in value during the marriage. In a divorce, a court may award a portion of that interest to the non-owner spouse. If the business does not have clear restrictions on ownership transfers, that award can result in an ex-spouse becoming a shareholder, member, or partner. This can create tension, disrupt management, and complicate decision-making. It can also expose confidential information and financial records to someone outside the original ownership group. Even when the ex-spouse does not want to be involved in the business, the lack of a clear exit mechanism can lead to disputes over valuation, payment terms, and timing.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a contract among business owners that governs what happens to an ownership interest when certain events occur. These agreements are commonly included in operating agreements for limited liability companies or shareholder agreements for corporations.
Typical triggering events include:
- Death of an owner
- Disability or incapacity
- Retirement
- Voluntary departure
- Termination for cause
Divorce is often overlooked as a triggering event, even though it is one of the most likely scenarios to affect ownership unexpectedly.
Why Divorce Should Be a Trigger Event
Including divorce as a triggering event allows the business or the remaining owners to purchase the affected owner’s interest before it is transferred to an ex-spouse. This helps preserve continuity and avoids unwanted ownership changes. A divorce-trigger provision typically requires the owner going through a divorce to either:
- Buy out the ex-spouse’s awarded interest, or
- Offer the interest for purchase by the company or the other owners under predefined terms
This approach protects the business while still recognizing the economic value of the ownership interest as part of the divorce process.
Valuation and Payment Terms Matter
A buy-sell agreement is only as effective as its valuation and payment provisions. Without clear terms, disputes can still arise. Clear valuation rules reduce the risk of inflated or inconsistent values being argued in divorce proceedings and help make the buyout feasible for the business. Well-designed agreements often specify:
- How the business interest will be valued, such as through an agreed formula or independent appraisal.
- Whether discounts apply for minority ownership or lack of marketability.
- How the purchase will be funded.
- Whether payment is made in a lump sum or over time.
Planning Ahead Is a Business Best Practice
No one enters a marriage expecting divorce, and no business owner expects their personal life to disrupt their company. Still, planning for this possibility is a matter of good governance, not pessimism. Reviewing and updating these agreements regularly ensures they remain aligned with the owners’ goals and current law. Buy-sell agreements that treat divorce as a triggering event are especially important for:
- Closely held businesses
- Family-owned companies
- Professional practices
- Businesses with a small number of owners
A Practical Takeaway
As this post-Valentine’s Day Tuesday Tax Take highlights, relationships do not end just because the holiday is over, and neither do the legal and financial consequences tied to them. When personal relationships change, the effects can reach far beyond the individuals involved and directly into the businesses they own. Buy-sell agreements that treat divorce as a triggering event are one of the most effective ways to protect business partners from unintended ownership changes and to preserve stability during difficult transitions. Planning for this possibility is not about expecting the worst. It is about recognizing that thoughtful legal planning can help keep business relationships intact even when personal ones do not.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
