If you are going through a divorce and own a business, there are special considerations you need to take into account to protect your legal and financial interests in that business. Depending on the situation, you may have to relinquish 50% or more of your business in a divorce. Here are some expert tips and insights to help you safeguard your business and prepare for the divorce accordingly.
Every Situation is Unique and Different
Every marital circumstance is unique, and there is no one-size-fits-all solution or strategy. That is why it’s important that you clearly communicate your goals and wishes to your attorney. That will help them devise a smart strategic plan to achieve your desired results. Do this proactively from the start, not “as they come up,” to maximize a successful outcome. Never discuss the business with your spouse or with their attorney during the divorce process, unless your lawyer is present. If needed, your attorney can handle discussions of any issues that arise with your spouse’s attorney.
Get Your Documentation in Order
Make sure that your financial documents are in order, including the cash flow and profit and loss statements, and tax returns. 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 be an ideal business strategy for whatever reason, it will prevent your spouse from receiving financial assets from the business that it may be better for you to instead have classified as your salary.
Expect that your spouse may hire a forensic accountant to separately go over every aspect of the business. 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 with your accountant or bookkeeper.
Is it a Cash Business?
If it’s a cash business, it can be even more problematic. For example, if you own a restaurant, the value appraiser might come in and literally stand by the cash register to see how much is collected in order to determine 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 have nothing to worry about. But if there have been instances where you didn’t follow all laws and procedures, tell your attorney right away.
Finding Undisclosed Business Assets
Often, the principals won’t distribute or report all the financial assets of the business – making those harder to trace and uncover. If assets are held in an account that is not transparently disclosed or reported, maybe nobody else knows about them. In shadier circumstances, it could be that taxes weren’t paid on those monies – which could represent a violation of tax law. However, a good divorce lawyer will have an experienced forensic accountant who is skilled at spotting current or past trails of undisclosed revenues or assets.
When Business Partners Divorce
When your spouse is your business partner, the divorce process becomes exponentially more difficult. A divorce court can’t undo a business partnership agreement, so there is typically a buyout of one spouse’s interest in the business by the other spouse. Sometimes, however, although it is not necessarily recommended, people stay business partners after they divorce.
Relinquishing Non-Business Assets
For most couples, the most valuable marital assets are usually their home or their retirement or other savings accounts. But when a business is involved, it is likely the most valuable marital asset. This means if you want to keep your business, you may need to negotiate a settlement by agreeing to forfeit non-business marital assets. For instance, you could end up agreeing to give up your half of the marital home and various investment and stock brokerage accounts − or a car or boat − as part of your buyout. You may keep your business, but your spouse could end up getting more than their fair share of the other marital assets. An experienced attorney can be helpful to ensure you retain the equity you deserve.
Business Ownership and Child Custody
Most small business owners work long hours, not a typical 40-hour workweek, with their weekends free. Therefore, your spouse may argue that they should become the custodial parent because you are not always available to take care of your child or children. On the other hand, as a business owner, you may have more control over your work schedule, giving you greater flexibility in that regard. You may also have a business health insurance plan that covers your children. In that case, your attorney can argue that your business ownership is beneficial for your kids.
Avoid Problems with a Prenuptial Agreement
According to Inc.com, “a prenup is probably one of the best and least expensive ways of protecting your business against a future divorce.” A prenup is a contract entered into before marriage that spells out what you and your spouse agree will happen if you become divorced. The courts generally accept these as a legal precedent, which makes them a very powerful instrument for protecting your business interests. Your attorney can help you draw one up, which can be a great business decision.