When you own a business with a partner, your divorce will impact that person too. Of course, if you have a carefully crafted Premarital Agreement along with a solid shareholder agreement, your path will be much easier. If you don’t however, you may need to be prepared for a complicated road ahead. At Alternative Divorce Solutions, we believe that mediation can remove a lot of the risks that go along with divorce when a business is involved.
For example:
– Using mediation saves you time. This gives you more time to spend working at your business. Any time spent in court is time you could use in a more valuable way.
– Using mediation preserves your emotional resources. There is nothing worse than being a stressed out shadow of yourself. It is unrealistic to expect that going to court to fight for your business won’t cause your performance at work to suffer.
– Mediation is less costly. Even if a professional business appraiser or neutral forensic accountant is used in your mediation, it will still be less expensive than hiring two or more experts in litigation. In addition, depending on the value of your business, litigating may cost more than what the business is worth.
Before I get into the options for business owners, I would like to point out the ways that issues arise when there is a business involved:
– Both spouses have owned and operated a business together during their marriage;
– One spouse has owned and operated a business during the marriage;
– One spouse owned a business prior to marriage and continued to operate it during the marriage (and there has been a change in value since the date of marriage); and
– Because there is a need for child and/or spousal support, we need to figure out a self employed spouse’s income.
In litigation, these issues are resolved through a drawn out process that involves court intervention, expert witnesses, and expensive reports. In mediation, however, we resolve these issues by negotiating through them in a peaceful and respectful manner. There still may be the need for a business valuation or forensic accounting, but we use one neutral expert who works alongside both spouses instead of hiring opposing experts who may have different views. This helps to provide the information the couple needs to make a decision without adding any unnecessary conflict to the process.
In mediation, here are the options you will have to consider:
– The “Buy Out”: Here, one spouse retains all of the interest in the business. As a result, he/she must buy the other spouse out of his/her interest in the business. For example, if Bob owns 100% of his business, he will have to pay his Wife Sally the equivalent value of 50% of that business. In mediation, Bob and Sally can decide where that money will come from. They can use cash, or can trade the 50% ownership interest for another asset. Our team at Alternative Divorce Solutions will help the couple lay out and evaluate their options.
Benefits of a buy out: The buy out is a clean break for both spouses and will eliminate potential conflict associated with co-managing the business moving forward.
Caution: This option could be problematic if there are no funds available for the buy out. In addition, to ensure a fair deal, there will probably be a valuation performed.
– Continue Joint Ownership: If you and your spouse have always been successful at operating the business together, you can still do this after your divorce. You will, however, want to make sure that you have a solid partnership/shareholder agreement in place to protect you from potential future conflict.
Benefits of Joint Ownership: Here, since you will continue to own the business together, a valuation is probably not necessary. In addition, you and your spouse will not need to worry about changing careers along with the other transitions you are facing.
Caution: This option will not work in a high-conflict divorce. This type of animosity will find its way into the business and can create risk.
– Sale to a 3rd Party: If neither one of you wants to continue on owning the business, you can always choose to sell it to an independent third party.
Benefits of sale to a third party: This is also a clean break for you and your spouse. In addition, it should give each one of you some money to start over with a clean slate.
Caution: Sometimes, selling a business takes time. Don’t move forward with a fire sale just because you want closure from your relationship.
Now that we have covered the options for negotiating ownership of your business, we should also discuss how to determine the income of a self employed spouse during divorce. Keep in mind, this calculation can be tricky. Even if a self employed spouse receives W-2 income from his/her business, it is still possible that there is more income because of personal expenses being paid by and through the business. In mediation, the solution to this problem is typically pretty straight forward. The spouses either agree on what the monthly income is (if they are both educated about the business enough to do so), or we bring in a neutral forensic accountant to determine this figure for the spouses. The forensic accountant does not perform any intrusive evaluations that would disrupt the daily business operations. Instead, he/she will look at the company’s financials, as well as the business owner’s personal finances to determine what expenses should be “added back” as income. This helps the couple resolve any issues relating to support, while still keeping them out of court!