Facing a divorce is always a challenge. As a business owner, the complexities are compounded. If you are considering divorce, you probably have concerns and questions about how to best deal with the separation of marriage and business. Divorce mediation ensures that both parties receive the best outcome for them, when the success of a family business is involved.
Some questions you may be having are…
- What is my business worth?
- How do we divide the business?
- How much of my business worth is considered marital property?
- How do I know what business valuation method to use?
- and many more….
Outlined below are a few scenarios to learn and understand what divorcing business owners commonly experience. It is important to understand that there is no ‘one size fits all’ solution, and what has worked for other couples may not work or be advantageous for you.
First and foremost, you need to know about the various methods for business valuation and their optional outcomes. In most cases, it is important to value your business at the time of divorce, to accurately discuss the future of the business, each parties’ future interest in the business, and to fairly divide assets between parties.
Valuations are done mostly in three ways:
- The Cost Approach – valuing the business’s net assets at the current fair market value
- The Market Approach – the business is valued based on comparable sales of other similar entities sold in recent years
- The Income Approach – valuing the business based on your earnings projection
The question sounds straightforward: “How much is my business worth?”, but many variables need to be addressed to place an accurate valuation. Inevitably, each of these valuation methods can (and will) produce varying results, so it is important to have guidance and carefully consider the variables, prior to your selection of a valuation method.
A solo-business owner would be drawn to the valuation method that resulted in the highest possible sale price. However, when in a partnership and divorcing, there are situations in which your business is considered a marital asset, and it could behoove you to use a method that does not result in the highest valuation. There are several options:
If you are your partner are unable to decide how to divide the business in divorce, there are two methods to consider, to ensure your assets are fairly divided.
- Equitable distribution is the most common business separation method, used in 41 of the 50 states. Using this method, parts of the business are divided equally between parties, while other parts are sold and the value is divided however is most fair.
- Community Property Distribution is a less common method, used in the following states:
- New Mexico
Using this strategy, everything is first classified as either ‘community’ or ‘separate’ property, with the community property being divided between the couples as a mediator, attorney, or the court sees fit. Each spouse maintains their separate property in addition to the community property being divided. However, frequently both parties lose some of the value during divorce proceedings.
Things become more complicated when you are the business versus owning the business. For example, if you are an accountant with a healthy practice of steadily paying clients. You have the necessary licensure, you have the knowledge, and you built a successful business because of the relationships you maintain with your clients year over year. Without you, what value does the business have, and how is it fairly divided in divorce? All of these situations are nuanced, unique, and difficult to value.
Other complexities may arise, such as:
- What if you choose to sell the business?
- Are you interested in co-owning the business?
- Could you buy out your spouse’s business interests?
Each of these scenarios has its own difficulties, but how do they apply to a couple in dissolution?
Selling the business relieves you of the pressure to co-own with your ex-spouse. You are divorcing for a reason, probably many. Communication breakdown seem to be a common theme in divorcing couples. However, if you sell the business, you are both stuck with the question of “What now?” when it comes to the next steps in your career. If you are required to make child support and/or spousal support payments, ensure that you plan ahead for these costs, to ensure financial solvency.
In some cases, divorcing couples decide who will retain a business early in the divorce discussions. This can streamline the process and eliminate the need for a business valuation. This decision is factored in as your other assets are divided. Remember, you are divorcing for a reason (probably many). A skilled third party brings neutrality, experience, wisdom, and objectivity.
Another option you may consider is buying out your ex-spouse’s interests in the business. To do so, a business valuation is typically necessary. This can complicate things for the buyer and the seller. If you were selling your business on the open market, it may bring a lower price than the result of a detailed business valuation. Remember that value is the determined only by the price that someone is willing to pay. Your spouse may want to be paid out at the higher price, which you may not feel is fair. It is crucial to understand the tax consequences to whatever option you agree to.
The next question when facing a dissolution of a business is: What percentage of the business is marital property, what percentage is non-marital, and what percentage is pre-marital property?
Businesses started by a spouse before marrying will be subject to a division of pre, non, and marital property assessment. What exactly that looks like for your business will be discussed in mediation. A variety of complicating factors make this question answerable only on a case-by-case basis.
- Was the business incepted prior to marriage?
- If the business was started during the marriage, what funded the startup costs of the business?
- Is your spouse an employee or a co-owner of the business?
- How long has each of you worked in or owned the business?
- What was the business valuation at the date of marriage?
- Did you invest marital funds into the business?
- If marital funds were comingled into the business, how have the parties been paying themselves?
- Are there any loans against the business, and to whom are the monies owed?
- Is your spouse an owner of the business in name only?
The last question on this list may bring into play a number of additional factors. If your spouse was an owner INO (in name only), they may only have some or even no ownership whatsoever. However, if your spouse was not working in the business but instead provided childcare so that you could continue working, how does that come into play? Your spouse may not have clocked in nor worked in the office, but their support was a part of its growth and success.
In mediation, the parties work together to develop a shared custody agreement that gives quality time to both parents, if appropriate and desired. Your mediator will also help you come to a fair and equitable division of assets, and specifies spousal maintenance and child support. If you decide to maintain the business and are expected to make child support payments, it is important to plan for this consistent financial support (paid monthly, to the parent who has primary custody). Business owners may face periods when payouts are low, in the interest of business success, so it’s important to plan ahead.
There are many complexities, variables, and landmines to avoid, when facing divorce while owning a business. Mediation is a fantastic way for business owners to pursue dissolution without decimating the business, by avoiding the overwhelm of dissolution in time and legal fees. Mediation helps both parties acknowledge and overcome these challenges, without the complications and added costs of protracted litigation.
When attorneys get involved, the costs increase and the proceedings can go on for years. Businesses become a liability, and are even more is at risk when the court becomes involved. In many cases, neither spouse is satisfied with the outcome of a divorce settled by strangers in a courtroom. It behooves all parties to set egos aside and work with an experienced mediator who can help you negotiate a plan to preserve assets. Being punitive does not benefit those who have worked so hard to build the business and grow your assets. Work with an experienced third party who can help you fairly divide your assets and move on.
Do not allow the fear of the unknown cause you to stay stalled in a marriage that is no longer working for you. As you consider your options, do not put your business’s success and your future at risk, and don’t overthink your options without consulting a professional. Educate and empower yourself by becoming informed of your rights and your state’s laws regarding community property, shared property, tax laws, and other factors. A skilled mediator can discuss a variety of options for asset division, which preserves civility, and helps you come to agreement outside of court.
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Whether you’re contemplating a divorce, have already started the process, or are far into the proceedings, do you wish you had someone to share with you the inside scoop on how to save money, time, and emotional energy on your divorce?
Our team is available for Support On-Demand to discuss the many scenarios, options, and implications of separation or divorce, via telephone or videoconference during this time. Feel free to get in touch with us; we are here for you!