When a couple decides to get a divorce and one or both of them owns a business, the process is going to be a lot more complicated. Businesses can be a major point of contention between divorcing spouses, with questions over ownership, valuation, and other important issues that need to be resolved.
When business owners divorce, it is definitely not a straightforward process, but this does not necessarily mean you have to litigate the case. You can effectively resolve the issues related to a family-owned or closely held business through mediation, as long as you work with a mediation service that has extensive experience with these types of cases and an in-depth understanding of the complexities involved.
On the other hand, if both spouses hire attorneys, things can become very expensive, and the process could drag out for an extended period of time. With this traditional approach, each spouse will typically hire their own forensic accountant. The forensic accountants go to work performing their own analyses and producing their findings, then they negotiate between the two findings and try to work out a compromise.
With our mediation process at AMS, we bring in a neutral third-party specialist, a CPA who specializes in divorces that involve business owners and franchise owners. Our CPA helps the couple work through all the nuances of business ownership during a divorce, and decisions are made after the parties have been educated and with input from each participant.
During this collaborative process, no settlement can become legally binding unless both parties agree to it. And if mediation does not produce an acceptable agreement, the spouses are always free to try a different approach.
Common Issues Involved with Divorce and Business Ownership
There are a number of details that need to be worked out during the division of assets when the divorcing spouses are business owners:
Determining if the Business is a Marital Asset
The first question that needs to be answered is whether or not the business is part of the marital estate, or if it should be a separate asset. This question is not easy to answer in all circumstances, because there are a lot of things that can complicate the issue.
If the business was started after the couple was married, then it is almost certainly going to be considered marital property. However, even if the business was started by one of the spouses before they were married, it could still be a marital asset if the other spouse made significant contributions to its growth or for other reasons, such as co-mingling of business and personal funds (more on this later).
Many business owners also enter into prenuptial or postnuptial agreements. If there is a valid marital agreement that addresses business ownership, then the couple will most likely need to adhere to its terms and conditions, as long as they are not unreasonable.
Determining and Splitting the Value of the Business
Small businesses can be very difficult to assign a value to because there are a number of unique factors that go into this equation. First of all, there are three primary valuation methods that could be used:
- Income-Based Approach: Basing the value on the business’ annual net revenue.
- Asset-Based Approach: Basing the value on the value of the assets the business owns.
- Market-Based Approach: Basing the value on how much similar businesses are selling for in the local marketplace.
The appropriate valuation method will depend on the type of business and industry. For example, if it is an online business with very few physical assets, then the income-based approach would probably make the most sense. If, on the other hand, it is a business that owns and leases commercial space, then you would probably use the asset-based approach. In some cases, a combination of these methods might produce the most accurate valuation.
Once on appropriate value is agreed upon, dividing the business between the spouses can be another major challenge because of the disproportionate value of the business in comparison to the value of other marital assets.
Potential Cash Flow Inconsistencies
Valuing businesses can be challenging in certain cases in which cash flow fluctuates throughout the year. For example, let’s say you own a resort on the Jersey Shore where business booms during the summertime, but things are dead during the winter. A business like this may be cash-strapped during the slow periods, and this must be taken into account. Some businesses also fluctuate year to year from being cash flow positive to cash flow negative.
Getting a true handle on business income can be very difficult sometimes because of the co-mingling of business and personal funds. Oftentimes, business owners will include quasi-personal expenses as business expenses, which paints a distorted picture of what the net revenue truly is. Some owners also underreport or delay the reporting of revenue for various reasons.
Business Interest and Involvement
There are many situations in which both spouses work in the business. In cases like these when they both want to stay involved in the business, it can be difficult to decide who will continue to run the business or of the business should be split between the spouses (if that is a practical option). Sometimes, divorced spouses are able to continue operating a business together as partners. In other cases, however, the best option might be to sell the business and split the proceeds.
How AMS Can Help Business Owners with Divorce Mediation
If you own a business and you are considering a divorce, you do not have to go through an expensive court battle to resolve ownership and asset division. At AMS, our experts can help you work through the complexities business owners face, so you can develop a peaceable and workable settlement that all parties can agree to.
Our mediation sessions are kept private and confidential, so the details of your divorce will never become part of the court record. And because participants are the ones who ultimately decide the terms and conditions of the settlement, you gain far more flexibility and control over the process, allowing you to develop creative solutions that can be tailored to your individual circumstances.
To find out more about our divorce mediation services and to schedule a free consultation, call our office today at (856) 669-7172.
This article was written as a collaboration between Roseann Vanella, professional family mediator for Advanced Mediation Solutions (AMS) and Jim Colitsas, CPA and partner with Princeton Financial Group (PFG). To learn more about PFG and their services, go to https://www.pfg-planning.com