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Dividing assets can be a contentious aspect of divorce even when you don't have much to fight over. When a small business is among the marital assets, property division can go from contentious to all-out war.
This is true for a number of reasons. First of all, a business is likely to be one of the largest assets in the marriage, often worth more than the marital home. Second, it's common for one partner to keep the home fires burning while the other devotes energy to building the business. The party who pours all of their efforts into the business might feel like they were doing all the work, which enabled the other spouse to be at home. Then again the other spouse may rightly feel that their efforts at home freed the business spouse up to focus on the success of the business, and that they deserve compensation for their sacrifice.
Third, businesses are notoriously difficult to value. Unlike a bank or retirement account, whose value is clearly set forth on a monthly statement, valuing a business, with receivables, capital assets, inventory and goodwill is much more challenging. Disagreement over the value of a business can lead to months or years of costly fighting in court. An appraisal itself can cost $10,000 or more.
In addition to all these factors, the very process of divorce can threaten the survival of a small business if the owners' attention is diverted by personal problems and stressors.
When is the best time to plan for your small business in divorce? Before divorce is even on your radar screen. It may seem distasteful to think about divorce as you're embarking on a marriage or starting a business, but planning for a contingency doesn't mean it will occur. And if it does, being prepared means that the divorce will be less costly to you, the business, and even your spouse.
In practice this often means executing a prenuptial or postnuptial agreement, even if that agreement is limited to the treatment of the business in a divorce. This accomplishes a couple of goals: limits fighting over the business in the event of divorce, and clarifies both parties' expectations around what will happen with the business. Sometimes having both parties sign off on a shared understanding reduces conflict in the first place.
What if, in addition to being partners in marriage, you and your spouse are partners in the business? In that case, it's wise to agree in advance about how you will divide the business. As a general rule, it's difficult at best for both of you to continue managing the business, and dividing the business itself may destroy the business and its income for both of you. Shareholder agreements or buy-sell agreements put in place long before a divorce can help smooth the transition if a divorce does occur.
If you find yourself in the middle of a divorce without having planned for your small business, don't beat yourself up; many people find themselves in the same position, and there is still time to make good choices.
One of these is to agree with your spouse on a business valuation expert, and agree in advance to accept their findings. Otherwise, you may each retain your own expert at double the expense, and if the experts' valuations are far apart, you'll spend precious time and money trying to fight for your position.
Working with the right lawyer is key, too. You'll want an attorney who is experienced in divorces that involve business ownership or other significant assets. Be sure to provide your attorney with all relevant documents regarding the business, including articles of incorporation/organization, bylaws, shareholder agreements, and so forth. These documents may restrict ownership rights and obligations and have an impact on how the business is treated in your divorce. An experienced attorney can help ensure that you don't settle for less than you deserve, or spend too much money fighting over an asset.
There are also some divorce attorneys who look at a marriage involving a small business and see dollar signs—for them, not their client. A protracted fight over assets in a divorce can mean a high legal bill, so make sure you're working with an ethical attorney who puts your interests ahead of their own.
If you are or plan to become a business owner or if you are married to one, take steps to protect your interests in the event of divorce. We invite you to contact us at Mundahl Law to learn more about how we can help small business owners in divorce. We look forward to working with you.