When you own a business and are served with divorce papers, what’s the first thing to do, other than find a good lawyer? Divorce is hard enough when you are an employee, but when you’re the boss, the discovery process (both sides gathering information through demand) just became much more complicated.
When you have a business, to be effective and profitable you need to be well organized. In the divorce process, you want to make sure that your financial documents are in order, including the cash flow and profit and loss statements and tax returns. For a modest size business, have the information in a QuickBooks file or in whatever accounting software the business uses.
Preparation is crucial because the process is intrusive and will invade your business with document requests, potential interviews with principals and perhaps even employees. All financial information regarding the business(es) will be exposed.
If you’re organized, you can do that efficiently and expeditiously, and it will be a bit less painful.
If you are worried about divorce down the road, you would be smart to take steps now to protect yourself. Keep personal and business expenses entirely separate if you are a sole proprietor.
Rather than put money back into the business, pay yourself a salary. While that may not prove the best move for your business today, it will prevent your spouse from receiving credit in the divorce for the portion of the business that might be better characterized as your earnings.
Speak Only with your Lawyer
Do not discuss the business with your spouse during the divorce process without your lawyer present. Your attorney can discuss whatever issue with your spouse’s attorney, but never contact your spouse’s attorney directly.
For asset valuation purposes, you must provide every piece of financial information available. That includes purchase and appraisal documents, mortgages, promissory notes and anything relating to debt. The valuator will likely want to speak to your accountant. Expect that your spouse may hire a forensic accountant to separately go over every aspect of the business.
If it’s a cash business, it can be more problematic. For example, if you own a restaurant, the appraiser might come in and literally stand by the cash register to see how much is collected in order to make inferences about a typical day’s cash revenue. As long as you’ve been operating the business in accordance with all the rules and laws, you should be fine. Some current or past lapses? Talk to your lawyer right away.
What is common in businesses is owners storing their a substantial portion of their worth there. Often, the principals won’t distribute all their money to themselves, or in less savory circumstances there are assets in a business that they put into an account that hasn’t been truly disclosed or distributed, or if it was distributed, nobody knows about it, and taxes weren’t paid on those monies.
Such assets may prove a little harder to uncover but a good divorce lawyer will have an experienced forensic accountant adept at spotting trails of undisclosed revenues or assets – current or past.
When Your Spouse is Your Business Partner
When your spouse is your business partner, the divorce process becomes geometrically more difficult.
A divorce court can’t undo a partnership agreement, so there is typically a buyout. The person who is mainly in control of the business will stay in control post-divorce and buy the other spouse out of their share. Sometimes, however, people still stay business partners after they’re divorced. It’s not recommended, but it’s not usual.
Most people just want to get away, but it can happen, and there’s not a lot the courts can do about it because the partnership is by contract and can’t be dissolved just because people are going through a divorce.
Giving Up Other Assets
For most couples, the most valuable marital asset is the home, although retirement accounts may surpass the dwelling’s value. When a business is involved, it is likely that it is the most valuable marital asset. This means if you want to keep your business, you may well have to give up other marital assets.
For instance, you could end up agreeing to give up your half of the marital home and various investment and savings accounts – even a car or boat - as part of your buyout. You may keep your business, but your spouse could end up getting more than his or her fair share of the other marital assets.
Every marital circumstance is unique and it’s important you share your goals with your lawyer early in the divorce process so he or she can put together a strategic plan to get your desired end result. Handling things “as they come up” is ill advised and rarely maximizes your result.
What does owning a business have to do with child custody issues? Most small business owners work long hours, not 9 to 5 with weekends free. That means your spouse may argue he or she should become the custodial parent because you are always working. However, if you have more control over your hours as the business owner than your spouse does at their job, that’s an argument that can be used to your advantage.
Going through a divorce is tough no matter the circumstances, but it’s that much more difficult when a business is involved. The right lawyer will help you protect your business and while working toward your best possible settlement.
Dror Bikel is a high conflict divorce and child custody lawyer based in New York City with a statewide practice. Many business owners opt for Dror as their attorney as he has both the big picture view of all moving parts of a divorce, including minimizing business disruption, optimally securing the best possible (for his client) valuation, and as a certified financial litigator – the experience and knowledge to challenge flawed assumptions and ambiguous numbers presented by his opponents. Connect with Dror: [hidden email]