In Season 5 of the hit legal TV show Suits, there is an episode where Harvey Specter, the main character and lead attorney at the firm, takes on a divorce case as a favor to his partner Louis Litt; Louis’s sister, Esther, is getting divorced, and her husband is demanding 50% of her successful baking and lifestyle company.
Unfortunately, this is not just exaggerated television drama; A business established during the intact marriage may well be a marital asset, and this can lead to very contentious litigation. in real life.
Separating two lives, no matter how long they have been interwoven, is a complex task, and when a business is involved, it raises the stakes – which often increases conflict and heightens emotions. If you own your own business, it will become a major part of the divorce proceedings, and this may be true even if you had a prenuptial agreement in place (although it is DEFINITELY true if you did not). This is true whether it is related to distribution of assets or income generated for support purposes.
Your divorce will be unique! If you have just started to think about divorce, or if you and your spouse are in the beginning stages of the process, it is imperative that you keep some specific considerations in mind at every stage of the process. Thinking through these issues and having these perspectives (ideally with the help of divorce attorneys who frequently represent business owners) will improve your chances of arriving at a favorable resolution.
Consider That All Of Your Financial Transactions Will Be Examined
Business owners often mix up their personal and business expenses (using a business account to pay for a cell phone, or for gas, etc.). Using business accounts to pay for personal items can cost you when it comes to being evaluated for alimony, child support, and more. Expenses covered by a business that lower your personal expense constitute income to you for purposes of calculation child support and/or alimony. If you know you are headed for divorce, this is a time to keep your business finances and your personal finances clean and separate to protect yourself. It is also a time to consider cutting expenses, just in case (and also so you are not accused of wasteful spending and any unnecessary transactions do not count against you). Keep accurate records of everything so it is easier for you and your attorney down the line!
Consider What Percentage Of The Business Is Marital Property
Did you start your business before the marriage or during? If it was prior to getting married, has it increased in value since then? Increased value in a business arising out of marital labor is a marital asset. If it was after, did you invest any of your own personal joint funds into the business? Does your spouse work for the business? Are they an owner “in name only”? Have they handled childcare or other tasks so you could spend time building the business?
All of these are questions to consider when it comes to deciding whether your business will be considered a marital asset or considered to have some marital equity, and if so, how the business, or the equity in it, will be divided.
Figuring out what percentage of your business is marital property and what percentage (if any) is separate property is a complicated legal and mathematical equation. Generally, separate property is any property acquired before the wedding. However, once property is mixed together (like a joint bank account), it can be considered marital property. If separate property, like a small business owned before the wedding, increases in value during the marriage as a result of marital labor, some of its value may be considered marital property as mentioned above.
The percentage of marital property will need to be divided in some way. For some couples, one spouse needs to buy out the other’s shares; for some, one spouse needs to trade shares for other assets; for some, keeping joint ownership with new guidelines is the right decision. An attorney can help you figure out what portion of your business will be considered marital property and what the most advantageous way to divide that would be.
There Are Many Business Valuation Methods, And Which Method You Choose Matters
The value of a business depends on what information you use to arrive at the valuation—you can arrive at vastly different numbers depending on the formula. That is because a business is a living, growing organism that is part of the larger ecosystem of the economy; both have the potential to change.
Some of the methods commonly used for valuation include:
- An asset-based valuation approach: values the business based on tangible assets
- An income-approach: values the business based on forecasted future earnings
- A market approach: values the business based on the value of similar businesses sold recently
- A “holder’s interest” approach: values the business focusing on the business’s worth to the owner
There are also many other methods that may be used.
Different experts may provide varied valuations, depending on what they take into consideration and what formula they are using! Here is the catch – you may want a valuation that shows a low value if your business is a marital asset, and your spouse may want a high one.
What if the value of the business is based on your efforts and relationships (for example, you are the only one licensed to perform a certain service, or if you left, all your clients would leave with you?). What if you went without a salary while the business was growing, and as a result, your business grew more quickly? Questions like these can also inform the business’s valuation.
What ultimately becomes the valuation will guide the asset division process, inform decisions on buyouts and settlement, and influence salary adjustments and stock ownership.
Consider That Your Business Can Affect Determinations Of Alimony, Child Support, And Custody (Timesharing)
A business owner’s schedule, and earnings, are often unpredictable. This can make creating a parenting plan for timesharing and determining a fair amount of alimony and child support extremely difficult.
For example, your salary is directly related to a business’s success. If things are not going well, you may need to forgo a salary or take a pay cut; if things are going well, you may receive a bonus. That means that giving a regular level of monthly support to your children or spouse may be challenging, if not seemingly impossible.
Also, as mentioned above, if your business is valued more highly, you may end up paying more in child support and alimony than you would if your business received a low valuation.
Consider The Relationship You Have With Your Spouse
Now is not the time for petty moves. If you have an amicable relationship with your spouse, do everything in your power to keep the peace; this will lead to more productive negotiations! If you and your spouse are at each other’s throats, try to at the very least avoid retaliating and do what you can to diffuse arguments. Anger does not make it more likely that you will get a good deal, or that the process will go smoothly. If you have a great attorney on your side, you can still “win” even if the battle is fierce, but having your spouse’s favor and avoiding the battle in the first place (if possible) will make a huge difference.
Consider The Different Methods Available To You For Resolving Divorce – Mediation, Negotiation, Or Litigation – And Which Lays The Best Foundation For What Matters In The Long Run
At the end of the Suits episode referenced above, Harvey—who is usually a fighter who never wants to lose a penny for his clients—encourages Esther to settle for 25% because there are children involved, reminding her there are more important things than money.
This is true. At Divorce & Mediation Law Firm Cabanas Law Firm, we believe that your peace and emotional well-being and your children’s peace and emotional well-being are truly the most important things; we care about your current and future happiness.
Because of this, we strongly urge business owners (especially those with children) to consider mediation, which is meeting with a neutral third-party mediator who can help you and your spouse find a creative, mutually agreeable solution to the above-mentioned business-related divorce issues without going to court.
Mediation saves a tremendous amount of time and money as opposed to litigation, and could be less disruptive to your business operations. It is more relaxed and could cause less stress for you and your children, and there is usually less fighting involved. You and your spouse do not have to like each other or get along for mediation to be successful, but it brings you both to the table with a common goal of collaborating to find a solution that works for everyone.
If mediation does not work, or if you do not attempt mediation, you will either have to communicate and negotiate through lawyers – like Esther did with Harvey Specter – which is another common way divorces are resolved when business interests are involved, or you will have to battle your divorce out in family court. Putting your case before a judge could be risky. The judge may render a judgment that you do not feel is fair, and the result could mean the end of your business. However, in some cases, you and your spouse’s relationship is too volatile for mediation or negotiation to be reasonable, and litigation is the only feasible option left. Rest assured that even though we recommend mediation, if we represent you, we will do everything possible to fight for you and your business, doing our best to ensure you don’t lose everything you’ve worked so hard for. After all, our firm’s motto is: Settle Where We Can, Fight When We Must.
Do Not Leave Your Divorce Or The Future Of Your Business To Chance!
If you are a business owner facing divorce, the best thing you can do for your business and yourself is to enlist excellent legal representation you trust (or talk with a lawyer you trust about the benefits of mediation). Divorce & Mediation Law Firm l Cabanas Law Firm is here to help! We are 100% dedicated to divorce and family law matters. Our dedication and knowledge of the law can make a difference for you!
We understand that your business and divorce needs are unique, and you can rely on us to give your situation the personalized attention it deserves. Call 954-447-2580 today to request your Free 15-Minute Case Evaluation and learn more about your options.
