Divorce is emotionally and financially stressful for all couples, but when one spouse owns a business that has supported the family, structuring a settlement can become complicated. With careful negotiations and planning, you can hold onto that business.
“Basically, you really want to try to maintain the value of the business and the value to the marital estate,” says Marc Effron, certified public accountant and managing partner at White Elm Group, LLC in Atlanta, Georgia. “The best way to do this is to make every effort to keep the business in place through the divorce process.”
A future perspective is important, as is protecting the business’s income stream, especially when alimony and child support are involved. Both spouses also need to be willing to compromise. “There’s a certain amount of cooperation and mutuality of interest when there’s a business involved,” says Gemma Allen, partner at Ladden & Allen in Chicago. “It’s in everyone’s best interest to make an economically viable deal.”
The divorce process can be very distracting too, and staying focused will help the business stay on track.
“Sometimes, a quick resolution will allow the business to succeed and extended litigation may kill the golden goose,” says Randy Kessler, founding partner of Kessler & Solomiany in Atlanta. “If you stretch it out, some business owners may just give the business up or close down the business because they’re frustrated -- that’s the danger.”
Here are steps to consider so that your business remains intact post divorce.
Determine the marital estate.
“The business owner needs to address whether the business is a marital asset,” says Sherry Ziesenheim, certified public accountant and Valuation and Forensics Analyst at Schaffner, Knight, Minnaugh & Company, P.C. in Erie, PA.
Whether the business was acquired or established during the marriage determines if it’s a marital asset. If the business isn’t a marital asset, the other spouse still needs to be reasonably compensated for their efforts during the marriage
Sometimes, when a business relies on a person’s skill set, like a contractor or a medical, dental or law practice, the person’s income is worth more than the business. “Does it make sense to look at it as an asset on the books or as a job?” says Sherry.
Also know what assets you have in addition to the business, such as investments and real estate — these are integral to negotiating a settlement.
Related: How to Divorce-Proof Your Company
Opt for mediation.
If a couple goes to court, the judge will decide. “Courts will probably not be as creative or detailed as you can be in a settlement or arbitration,” says Kessler.
Mediation can give you more control over the outcome, and the process is less expensive. “A mediator is a facilitator,” says Allen. “They try to facilitate the party’s own agreement.”
While you may need multiple valuations in court depending on the jurisdiction, in mediation, the two parties can agree on one expert to provide a valuation. Valuations can be expensive and time consuming. Consider how much is at stake. “If you’ve got a big business worth $100 million, you’d want your own expert at least advising you related to the valuation being done,” says Jerome Johnson, certified public accountant in Albuquerque, New Mexico.
Value the business.
“People are rightfully concerned about [the valuation] because you’re not selling the business, but someone is valuing it as if you are going to sell it,” says Allen. “There could be a wide discrepancy on what it’s valued at versus what it can be sold for.”
Hiring an expert who understands the business and can measure the value at the proper standard for divorce purposes is key. Each state law mandates a value that’s different than what the owner would get if they sold the business in the open market. But, an inaccurate valuation may temper your business’s long-term ability to operate at a profit.
“When you’re going through a divorce and dividing up the property, you need to have a realistic understanding of how much that business is worth,” says Michael Kaplan, certified public accountant in Woodland Hills, CA. “The sooner in the process the business owner understands this reality, the sooner they can sit down with their attorneys and professionals and structure a way to divide the marital estate.”
Structure a buy out.
There are different ways to buy the other spouse out that allow you to continue to operate the business.
Consider an installment plan with payments based on revenue or a set amount that’s paid over time, plus interest, with an acceleration clause if the business sells. There are different ways to structure these payments so that the company is able to hold onto working capital assets to achieve growth and income forecasts. “Have security in place like life insurance that would cover the payments in case something happened to that spouse or in case of default,” says Brian Blitz, principal at Berger Schatz in Chicago.
A lump sum to the other spouse can help the business owner maintain full ownership and control after the divorce, but these aren’t always a 50/50 split. “Sometimes the [other] spouse is willing to say you don’t have enough cash, but I would feel more comfortable if we’re not intertwined and will take what you have because I want this to be done,” says Effron.
If you don’t have the cash for a lump sum payout, your marital estate may have significant assets that can be used to equalize the value of the business.
When the plan is to sell the business in the near future, you can structure a sale-based payout such that the other spouse only receives a percentage of the sale proceeds while forgoing any other payments.
Don’t change business practices.
Altering how you do business generally backfires, like running expenses thought the business or drawing a lower salary. “Just conduct your business as you always had for the most part and if you’re not sure because you want to alter a practice, just ask,” says Blitz.
Don’t work together.
“It’s rare that a couple can work together after a divorce because there will be tension and employees can feel it,” says Kessler. If you ran your business with your spouse, the other spouse may want to pursue another profession after the divorce.
One way to avoid partnership disputes is by holding the other spouse’s interest in a constructive trust. This way, the owner has all the control and fiduciary responsibilities to manage the business and maximize its value.