Q: My spouse and I own a family business. But my spouse
mostly runs it. What is likely to happen?A: Typically, one party (the husband, say) continues to run (or
participate with other family members) in the business after the divorce.
Typically, the ownership interest of the other party (let's say it's the wife)
is "bought out."
The parties agree on what the business is worth, and on what the wife's share is.
For example, let's say the parties agree that the business is worth $100,000 and the
wife's share is 40%. Then the wife is entitled to receive $40,000 (40% of $100,000) for
her share of the business.
She may receive this $40,000 in the form of cash or other property (the house, say).
Or, she may receive a promise to pay $40,000 from the business itself (this is called
"a note.")
Q: What if I didn't work in the business at all?
A: The wife does not have to work in
the business to be entitled to a share.
Typically, the wife will get closer to half the business the greater the percent
of the business's value that was created by the husband during the marriage, and the
longer the marriage lasted.
And a wife's direct contributions to the business also count significantly.
(Needless to say, the genders in this example are often reversed in real life.)
Q: What other issues should I think about with
respect to our business?
A: Here are some key issues you will have to decide:
- Valuing the business. The main question usually is, "what is the business
worth?" In New York, which is a special case, the mere fact of the attainment of a
professional degree (law or medical, for example) creates an asset to be valued and
divided in the divorce.
- Running the business. If both spouses have worked in the business during the marriage,
you will have to decide who will run the business afterward. Occasionally, divorced
spouses both continue to work in the business, but that is the exception.
- Getting information about the business. Often, only one party understands the financial
side of the business. The other party has to get enough information to feel comfortable
with the agreed value.
- Structuring the buyout. If one party will buy out the other, will the buyout be made all
at once, or over time? Will the buyout be made with debt, or with other assets?
- Planning for taxes. The different buyout approaches can look the same, but have
thousands of dollars of differences in tax effects.
- Marital versus separate property. If one spouse worked in the business before the
marriage, there is a question as to how much of the business is "marital"
property? In most states, only the "marital" portion is available to be divided.
Q: Do You Have Some Tips?
A: Here are some tips to consider for dealing
with the key issues raised by a family business.
- Hire an appraiser. There are people who specialize in valuing businesses. Often, each
side hires its own appraiser, and then the parties negotiate. If you can agree on a single
appraiser, you can save time and money. Don't just accept your spouse's word for
what the business is worth. Hire a professional whom you trust to confirm it.
- Look for "off-balance sheet" assets. These may include accounts receivable for
a cash-basis company. Also, there may be "depreciated" assets that still have a
lot of value.
- Look for hidden assets. Is cash going somewhere other than back into the business? Do
the books show assets that are not needed in the business? These can be tip-offs to a
business that is transferring cash away to make the value appear smaller. You may
want to hire a financial detective. These people go by the name of "forensic
accountants," and they help find the true state of a business.
- Don't forget part-time businesses. Think about the additional cash generated by
participation in part-time sales, contracting, or consulting work.
Q: Can the Family Law Software Planner help?
A: Yes. the Family Law Software Planner can walk you through the financial and tax effects of each of
the common ways of dividing the business. You can save thousands of dollars in
tax savings, and you can get a better financial deal as well.
The Planner also gives an overview of the kinds of information you need to help value the
business and where to look for that information.
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