Owning A Business and Divorce
Starting your own business is the dream of many people, but one thing that is often forgotten is that a failed marriage can negatively affect the business you worked so hard to build.
Certain divorce issues are unique to business owners, but there are ways that you can protect yourself and your business during a divorce or dissolution.
No one wants to plan for a marriage to end, but if you are starting a small business thinking about the worst that can happen is a good idea.
Any business that doesn’t have a prenuptial agreement, shareholder or buy-sell agreement in place—contracts how business owners buy or sell their interests—can result in a messy legal battle. Not only can the legal fight for business assets last for more than a year, but it can also ultimately cause the business itself to fail.￼
When it comes to your marriage, plan for the worst and hope for the best by having one of these agreements in place.
If your marriage has already started to break up and you’re looking to minimize the effects on your business there are steps you can take: remember what is best for the business, hire a business valuation firm and try mediation.
One of the hardest things to do during a divorce is valuing a business and figuring out which spouse should receive what. Separate property is any property owned by either partner before the start of the marriage.
It can also include inheritances or gifts received solely by one spouse during the marriage. Marital property--also known as community property--is all income and assets acquired by either spouse during the marriage, including a business.
Unlike promises found on late-night infomercials, overnight success is rarely something that happens to businesses in real life. As married small business owners know, usually sacrifice and success is something that both spouses participate in.
From the view of the court, even when one spouse may have put in most of the effort to build the business, the support given by the other spouse has value. More importantly, even if the business is registered in only one spouse’s name or begun before the marriage if it has increased in value during the relationship, it is considered marital property.
Remember What’s Best for the Business
Divorce is a painful process, and it can be tempting to want to inflict that pain on your ex.
But thinking that way makes you focus on the wrong things--when you should be focusing on the business. If you find yourself in this situation, sometimes it’s best to have a neutral third party come in and handle the day-to-day running of the business while you are going through a divorce.
You don’t want to end up fighting for your business only to have it fail because you are too distracted to run it efficiently. At a minimum, you should talk with trusted friends and associates to make sure that you are making good business decisions during the divorce.
Hire a Business Valuation Firm
Hiring a business valuation firm can be just as important as hiring a good attorney. The price tag for this can be expensive and unlike a good attorney, sometimes spouses should hire the same business valuation professional. Why? It will help streamline the process and keep costs down, especially if the books and records of the business are well organized and readily available.
There are three common methods used for small business valuation. Businesses can be valued in several different ways: book value (asset approach), comparable sales (market approach) and the income approach. The choice of which method is used often depends on the type of business being valued.
Book value is usually considered the total amount a company would be worth if it liquidated its assets and paid back all its liabilities. The asset (book value) approach method seeks to determine the business value through the assets of the business.
The idea is to determine the business value based on the fair market value of its assets less its liabilities. Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference between these is considered the business value.
The market approach based valuation methods looks at the business value in comparison to sales involving similar businesses. As the name implies, the market approach relies on signs from the real marketplace to determine what a business is worth. Here the economic principle of competition applies.
The income approach methods determine the value of a business based on its ability to generate desired economic benefits for the owners. The income approach takes a look at the core reason for running a business – making money.
If I invest time, money and effort into business ownership, what economic benefits and when will it provide me? Since the money is not in the bank yet, there is some measure of risk – of not receiving all or part of it when you expect to.
So, in addition to figuring out what kind of money the business is likely to bring, the income valuation approach takes risk into account.
The end of a relationship can be amicable, even for business owners.
Try sitting down in a mediation together to work out your plans for the business. Don’t get caught up in petty arguments that result in more complications and end up hurting the business in the long run. Prolonged litigation can mean that the only people that end up making money from your business are the IRS, the state and your attorney.
Ideally, spouses can end up making an arrangement that helps ensure that the business continues while the nonparticipating spouse receives a fair amount for their part of the business after the divorce.
Unfortunately, sometimes mediation doesn’t work. When parties can’t agree, the court or the respective attorneys may decide that the only solution is to split the business in half or sell it and split the profits.
Should you Split the Business?
While splitting the business can initially make sense, it can often depend on the two people involved.
Keep in mind that a business made up of two equal partners who aren’t on good terms isn’t likely to succeed for very long. If you feel that this is the case, try to find a way to give one partner total control of the business.
Often a settlement with a lump sum payment or using structured payments can be reached. Making installment payments over some time can be less disruptive for business and ensure that nonbusiness assets such as real estate, retirement funds, cash, and stocks are kept safe. Settlements made up of structured payments can also be used to avoid selling the business outright.
This is usually accomplished via a property settlement note, which spells out the details of a long-term payout, often with interest, of the nonparticipating spouse’s ownership share of the ongoing business.
Remember that when it comes to owning a business, planning can save you from future headaches as well as expensive litigation. If you put in place the proper tools, such as a prenup, shareholder or buy-sell agreement the end of a relationship doesn’t have to mean the end of a business.
Jack W. Carney-DeBord is licensed and admitted to the practice law in the State of Ohio-ONLY. Jack has no intention of soliciting clients in any state other than Ohio and nothing posted on this website should be viewed as an attempt to solicit or do business in ANY state other than the State of Ohio.
The content on this website is provided as general information only and is not legal advice. You should not act or refrain from acting based upon information provided in this site without first consulting legal counsel.
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