During your marriage, you acquired a business. Now, you and your spouse have separated. Shutting the business down because you have separated is not a viable option. It is important to understand that during a period of separation and divorce, you still have a fiduciary duty to the community to protect and maintain community assets. There are several things you can do to make the process of valuing the business easier during the divorce. This information will help you decide how to divide the business (or not) during a divorce.
Businesses are handled like other property. Under the most straightforward circumstances of community property, you divide the business equally (50/50) in a divorce. Unfortunately, dividing a business is never that simple.
The best thing you can do at the time of separation is to gather all your financial documents for your business. This includes bank statements, credit card statements, profit and loss statements, accounts receivables, accounts payables, tax returns, payroll reports, and balance sheets. Make sure you have at least the last three years financial documents readily available. Having documents that can also back up your accounting is a good idea.
If your spouse is amicable and both understand the market well, you can reach an agreement on the property’s value together. More often, however, people going through a divorce will hire an expert to prepare a business valuation. You and your spouse can hire a joint expert, or you can each hire your own expert. Keep in mind that expert witnesses can be costly but are necessary in cases where businesses need to be divided.
Use an Expert to Divide your Business
Once an expert is hired, you will want to provide all requested financial documents to the expert. Your cost will be considerably less if you provide the requested documents to the expert quickly and in a clean, neat package rather than piecemeal.
During this process, being truthful and open about the business and its financials is essential. The business’s fair market value is often more than you, the business owner, thought the business would be worth. Many factors determine the value of the business, including accounts receivables, debts, tangible assets, and overall annual profit. If you receive Perquisites from the business, they may be added back to its overall assets. However, being open and truthful will help with the eventual buyout of the business. Before hiring your expert, talk with your attorney and the proposed expert. Make sure you have a thorough understanding of the method the expert will be using. Then, you will not be caught off guard when the valuation is completed.
It is important to remember that while you may consider a business “yours” if it was started during the marriage, your spouse has a right to see the books and financial documents associated with the business during marriage and even during divorce proceedings. To avoid costly litigation, sharing those documents voluntarily is a much better practice. Discovery proceedings can be rather lengthy and expensive. Furthermore, when a party is not forthcoming with the information necessary to value an asset, it creates a level of distrust during a tumultuous period which can impact the tone and length of your divorce.
After the value of the business is decided
Once the business’s value is determined, you and your spouse can discuss what will happen to it. Typically, one person will buy the other person’s interest in the business out. This can be done through a one-time lump sum payment. Another way to purchase the interest is by offsetting the community’s value in the business with another asset. For example, maybe there is a community account with similar value to the business. In that case, one party would take the business, and the other would take the account. Another option is for one party to make monthly payments to the other party. In that instance, the seller typically will have a promissory note or lien on the business or another asset to secure their interest in the business during the purchase.
While a divorce can be devastate a community business, if both people remain truthful and open regarding the business’s financial state, the valuation can be done efficiently, allowing the people to negotiate a settlement. If a settlement cannot be negotiated, then the people will be putting the future of their business in the hands of the court to make the final decision on how the business should be divided. While sometimes that is necessary, it is in everyone’s best interest to attempt to resolve the division amicably.
Reach out for help with diving a business during a divorce or any other family law matters.