When one or both of you owns an interest in a family business, you have to deal with all the normal issues present in any divorce. In addition, however, you face unique challenges presented by the business itself. This page covers the basics.
Sometimes one or both of you may be interested in continuing as business partners after divorce. The problems are obvious, the solutions less so. You’re getting a divorce because you’re not able to manage a marriage together. Why is it that a business would be different?
It’s rare, but not unheard of, for you to be able to continue a business partnership even after you divorce. Perhaps the cause of your divorce is, say, a sexual preference issue. If you communicate well, you may be able to continue as partners of some kind.
Even if you choose to continue as partners after divorce, you need to have a thorough exit strategy, so either of you can gracefully end the partnership later if it’s not working. That means you and your spouse need to agree now on what rights either of you would have if you decide later to end the partnership.
Your exit strategy should include arrangements for how one or both of you would end your employment and what help, if any, you would get with the replacement of group benefits. It also should include what value one or both of you will receive if the business relationship ends later. Buyout? Formula payment? Dutch auction?
Even if you can’t manage together, you may be able to sever the business in some logical way, leaving both of you able to participate actively but in different spheres.
If you’re both going to participate in any way in the operation of the business and you’re not going to manage together, you simply must take appropriate measures so neither of you is vulnerable to lapses in quality control or service level caused by the other.
How would you feel, for example, if your spouse — operating with the same name — becomes chronically slow with accounts payable? Unless there’s some overwhelming reason not to, you and your spouse should use different names for your respective business operations.
Whether the business will be severed or will go entirely to one of you, the most heated questions will often involve the value of the business, and sometimes, how much of it is marital property. The measure of value for a business in divorce is as simple to state as it is difficult to apply: the price a willing seller and willing buyer would agree to use if both had reasonable knowledge of the relevant facts and neither was under any compulsion to buy or sell.
Put simply, the value of a business is the value today of a series of expected future benefits. These include cash distributions, various noncash benefits, and cash from the eventual sale of the business. Financial statements and tax returns are necessary but not sufficient for calculating the value of the business.
The performance of the family business is often disappointing during the divorce process. Business owner spouses who are divorcing almost always describe some critical disadvantage looming on the competitive horizon and causing the business value to be less than expected. Deciding how much of this is real requires an expert.
If the business is worth more than $300,000 or so, it’s often worthwhile for both spouses to contract together for valuation by a Certified Valuation Analyst (CVA). CVA’s are trained in a rigorous discipline of valuation principles. Two well-trained CVA’s, given the same information, will produce remarkably consistent values.
Expertise in the industry is more important than geographical proximity. That is, a printing business valuation expert based in Portland may value a printing business in Nashville more efficiently and effectively than a generalist based in Nashville. For more information about a CVA appropriate for a specific business, call the National Association of Certified Valuation Analysts at (800) 677-2009. The cost of a valuation will vary dramatically depending on complexity.
If the business has a low value, it’s difficult to justify the cost of a thorough valuation. The spouses can fall back in these cases on the more traditional means of valuation: CPA’s, buy-out agreements, and analyses of financial statements and tax returns.
If the business predated the marriage, valuing the portion that constitutes marital property can be as difficult as valuing the business, if not more so. The process usually starts with valuing the business interest today, followed by the excruciating process of valuing that same business at some point in history, often with adjustments for a series of additions and withdrawals of principals over the years.
The valuation of a business is complex and time-consuming, but it may also be the most important question you and your spouse need to answer as you work through your divorce. To keep the site manageable, there’s a separate page that focuses on Valuing a Business in Divorce.
Divorcing couples have many choices for getting value to a departing spouse, but because cash is usually limited, they often end up with some form of payment over time. You’ll need to think through bankruptcy and debt issues, tax issues, and how you can structure a financial strategy for living in the meantime.
You face a particular challenge if you’re the departing spouse who will receive a payout over 5-10 years. You may be tempted to use the payout to maintain your pre-divorce lifestyle while the payout continues.
Selona fell into that trap. She agreed to accept $760,000 for her share of her husband’s medical practice and to receive it over four years. She stayed in the house, continued to give her children extravagant gifts, and made no attempt to find a job for the first two years. By the time she came to see me, she had only a year and a half left of the payout, and she was facing a daunting financial challenge.
Selona’s going to get through this okay. She’s a survivor, she’s talented, and she’s willing to work. But she knows now how much better off she would be had she changed her lifestyle immediately after divorce instead of waiting more than two years.
Because a business is often a source of wealth, it’s easy to assume that everything is dollars and cents and that the emotional issues will be minor. Mistake. Big mistake. First, the one who has always operated the business must work through the outrage he or she may feel about having to share the business wealth at all. And often other family members in the business will aggravate the conflict.
Perhaps most important, however, are the issues surrounding the relationships among company staff and the departing spouse. Often any discussion about the departing spouse has been taboo in the business during divorce. Company staff and the departing spouse may both be grieving quietly over lost relationships, with little opportunity to express their grief.
I encourage you to consider some kind of ritual to allow closure. Could the staff at the business have a going-away party for the departing spouse? If the departing spouse has pictures or other personal belongings at the business, could you agree on a time for the departing spouse actually to come to the business to remove them? It could even be as simple as a chance for the company staff to take the departing spouse to lunch to say goodbye.
The business owner spouse may want to be far away from the business when this is happening. That’s okay.
This is an issue that’s troublesome enough, and complex enough, that I’ve included lots of resources here on Divorceinfo.com about it.