Divorce: A Corporate Killer

“Blocks Post” in Krün, Upper Bavaria, has long since ceased to be an insider’s tip. Its blend of modern and classic regional cuisine enjoys great popularity even beyond the Karwendel Mountains. Just under four decades ago, Josef “Sepp” Block acquired the business together with his mother. Parts of the building, which is 500 years old, once served as a stopover for King Ludwig II during his mountain hikes. “There were always lots of celebrations here,” says the 57-year-old innkeeper. “In the good old days, we served up to 500 hectoliters of beer a year. That’s 100,000 half-liters a year, after all. An impressive figure for a village inn.”

War of the Roses in the Alps

But Block also experienced hard times at the former Post. He had to cope with a bitter blow after his ex-wife filed for divorce in 2001. The dispute between the former spouses lasted nearly three years. The fact that the innkeeper had gradually invested a large portion of his savings during the marriage in stocks was to have particularly dramatic consequences. Over several years, the father of three bought and sold risky securities and was able to record substantial capital gains. “In 1998, I was a millionaire,” he recalls. “But only on paper.” When stock prices plummeted in September 2001, the divorce turned into a financial disaster: The large portfolio served as the basis for calculating the equalization of marital gains following the separation. Difficult years followed, which brought Block and his sons closer together. Together, they completely renovated the historic, listed old farmhouse from the ground up. They spent more than three years doing all the work themselves. “I know every brick in this house. You don’t just give up on something like that,” says Block. A sustainable investment—“Blocks Post” continues to operate extremely successfully today.

The Risk of Community Property

Hard times following a separation or divorce are nothing new. This is especially true for entrepreneurs like Block. Disputes over joint assets can become problematic when a shared business is at stake. Unless otherwise agreed upon in a contract, the marital gain—that is, the assets accumulated jointly—is divided equally. This includes not only joint real estate or the securities portfolio, but also a business and equity interests. Furthermore, the value of the business is usually disputed, so it is not uncommon for multiple expert opinions to be required for assessment. Often, there is even a risk that real estate will have to be sold or even auctioned off.

“If assets must be settled between the former spouses at a fixed point in time as part of the equalization of accrued gains, unplanned, large payments can cause massive problems even for a thriving business,” says Jürgen Bestelmeyer, a renowned Munich-based expert in family and inheritance law. If the marriage breaks down, payments may be due at an inopportune time. “It is therefore generally helpful to have a prenuptial agreement that separates private and business assets and subjects them to a modified equalization of accrued gains provision.”

Another problem arises when the spouses own shares in the joint business. Bestelmeyer: “If one of the partners wants to realize the value of these shares and there are no contractual provisions in the event of withdrawal, this may, under certain circumstances, also result in the shares having to be sold to a third party.” Another risk to the company’s continued existence: Both spouses held positions of responsibility in the family business, and continued professional collaboration no longer seems possible for personal reasons.

Even a wife who works in her husband’s business for only a pro forma salary may have shareholder rights. Family law expert Anette Breucker of the law firm Wüterich-Breucker in Stuttgart explains: “In such cases, the law offers a largely unknown loophole.” What is meant is the so-called “spousal partnership.” This stipulates: “In the absence of an express agreement, it cannot be ruled out that the spouse is entitled to half of the ‘joint’ business.”

Equalization of Gains and Alimony

For the legally mandated equalization, the initial and final assets of both partners are compared. Since a reform passed just under five years ago, negative initial assets are also taken into account. Previously, only any surplus accumulated during the marriage was divided equally. Another important new provision concerns the obligation to disclose information at the time of separation. Because at least one year elapses between separation and the filing of the divorce petition, the party later obligated to pay had many opportunities to “make themselves appear poorer.” For example, by citing asset losses or liabilities in the business.

The new regulations make it more difficult to shift assets during the year of separation. Determining the amount of spousal support also holds the potential for conflict. The basic principle: If one spouse’s income is significantly higher than the other’s, the financially weaker spouse can assert claims for spousal support. This applies even if their own income is insufficient to maintain their previous standard of living. As a guideline, the ex-partner receives about half (3/7) of the total available net income. Deductions include work-related expenses, child support, retirement savings, insurance, and loans. The housing benefit from a property and the partner’s other income are also factored in.

Maintenance obligations for the self-employed and business owners are based on business profits. If the business is performing poorly or has ceased operations, this also reduces the maintenance obligations. “Nevertheless, personal withdrawals must not be disproportionate to the profits,” attorney Bestelmeyer points out. “Furthermore, the principle of the established marital standard of living applies here as well.” When dividing assets or settling alimony, ex-partners may well resort to underhanded methods. Any transactions whose sole purpose is to circumvent the partner—such as transferring funds abroad or to family members or friends—are on the fringes of legality. “Even payments to immediate family members are considered a disloyal disposition of assets if they would have been atypical during the marriage,” explains Bestelmeyer. When calculating the marital gain, such outflows do not reduce the ex-partner’s entitlement to equalization. But what should you do if one of the partners squanders all the joint funds immediately after the separation? “The only option for the affected party is to freeze joint funds and accounts as quickly as possible,” says family law expert Breucker. The law also offers a solution: In cases of strong suspicion and concrete evidence that the wealthy spouse is being defrauded, a so-called attachment of the entire estate can be requested. The consequences: a temporary freeze on all funds and an early equalization of marital gains.

Clarity Through a Prenuptial Agreement

Breucker advises self-employed entrepreneurs to clarify all business matters through a prenuptial agreement. For prenuptial agreements to hold up in court, they must specify as precisely as possible the parties’ motives for entering into the agreement, the assets they own, and their family planning. Pure separation of property is risky. If, for example, one party is significantly disadvantaged, the agreement may be invalid. A mutually agreed-upon strategy is certainly better than bitter legal battles, as in the Block case. With a well-thought-out separation and divorce settlement agreement, individual arrangements that are advantageous to both parties can be reached. “Lawsuits cost money, nerves, and time, and they also undermine the atmosphere for economically sensible solutions,” Breuker notes.