Should you file for a Business Divorce?

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Sometimes, you just have to file for divorce from your troubled business.  Unless, of course, you are tempting fate by operating as a sole proprietor or partnership.  Or if you don’t have a business pre-nuptual agreement in place.  This means that you may have signed personal guarantees up to the hilt.  So if your company goes down the tubes, you go with it.

In my line of work, I do everything in my power to reduce business debt and increase revenues.  But sometimes – not too often in my experience – the owner just has to let go and file for a business divorce.  I was thinking about this the other day after hearing from an old client.

I’ll call him Mark.  His original clothing manufacturing business just hadn’t made it.  He had been at a significant competitive disadvantage with Asian manufacturers.  He then focused on garment design for the childrens’ market in the 1990’s.  When I got to know him, that wasn’t working, either.

Truth be told, Mark was a poor marketer and sales person.  He liked clothes design, but just didn’t like dealing with people.  And that was a huge problem.

Mark’s company’s growing debt load was way too high for its revenues to handle.  Even if deeply discount payment plan settlements could have been worked out, it wouldn’t have helped.  The writing had been on the wall for years.  But he had to be told by an imparitial, friendly source that he had to get out.  He needed to divorce this turkey in a way in which he wouldn’t lose his shirt.

In his case, he was able to get out with his equity intact.  He had gotten good legal advice at the outset and had a pre-nuptual agreement with the business.  There were no liabilities in Mark’s name.  If the business had to go, it was asset-poor and wouldn’t take his stuff with it.  And this meant that hostile creditors would not be able to claim monthly alimony payments.

I had suggested to Mark that he get a job for the time being, until he found another entrepreneurial niche.  He promptly found a high paying marketing position, in a rapidly growing, publicly traded Internet startup.  This was before the dot-com bubble burst in March, 2000, when just about any new web-based venture could find enthusiastic investors.

Mark was unlucky in one sense, but lucky in another.   He was as hapless at his job as he had been in his business, perhaps predictably so.  And he was fired after several years.

But luck was on his side.  He had gotten large sums of company stock, partially in lieu of pay.  This had rocketed in value from day one.  But he cashed in his shares, determined to completely sever his association from the firm and to invest his funds elsewhere.  Happily so, because the following month the company stock tanked.  Fortunately for him, his equity was protected and not immediately reinvested in another dot-com.

Mark bought a mansion on a large piece of land outside of Philadelphia.  He tells me that he never needs to work another day of his life.  And it’s all because he decided to file for that business divorce, after protecting his personal assets.  He landed on a feather bed, rather than with a thud on the sidewalk.

This was an arrangement that worked out beautifully, if in an unusual way.  Lady Luck was very much involved.  But the moral is to protect your personal assets from the outset and, if things look truly bleak, get out when the going’s good.

You are not your company.  It is a separate entity, but even so, you are not necessarily married to it for ever.  If  real game-over trouble hits the business, it’s not the end for you.  Other opportunities lie around the corner.

If you wait too long, after you have exhausted all reasonable alternatives, that beloved business might just rise up and smack you, then run off with every penny you’ve got.  And what could be worse that that?

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