Divorce can be a nasty process, and it’s even more complicated if you are in business with your soon-to-be ex-spouse. Alan Schachter, a certified public accountant for Citrin Cooperman who specializes in accounting and business valuation issues involving divorce, says that although it can be extremely difficult, coming to an amicable agreement can save your business a great deal of money. It can also save both and you and your employees a great deal of stress.
“The cost of litigation and time lost can be very high,” he says. “You need to put personal differences aside to preserve the asset.” Here’s what to expect when you divide your family business during a divorce.
Who Will Get Involved
If you decide to not continue running the business together after the divorce and it comes to splitting assets, Schachter highly recommends hiring a family lawyer as opposed to a litigation lawyer because he or she will practice mediation, which saves time and money from staying out of court. “This is an emotionally charged process,” he says. “Everyone wants to do it peacefully.”
An appraiser will also be required to place a fair market value on the business and its assets, so it’s important to have any relevant documents prepared and ready, including any stockholder agreements, marketing plans, budgets, tax returns and contracts.
What Questions Will Be Asked
Bill Barrett, an attorney with the law firm Mandelbaum Salsburg in West Orange, N.J., says the general rule of thumb for splitting business equity is 50/50, but that’s not always appropriate if one spouse is thought to contribute more than the other. In order to determine how much of the business’ value belongs to each spouse, considerations like these will be made:
- Did the couple start the business together or did one spouse come in later as an owner?
- Who provides the most value in terms of profit? For example, if the business’ main profit comes from consulting, does only one spouse provide the product of consulting expertise?
- Can the responsibilities of one spouse, such as marketing and accounting, be outsourced?
Going into business with someone else is a big risk, which is why Barrett strongly encourages being proactive in creating a shareholder’s agreement when forming the business. Although it’s unpleasant to think about, always consider that a divorce could happen and form an agreement to spell out how a company is valued. Much time and legal costs can be saved by creating a valuation formula in the beginning, which the accountant will apply at the time of the divorce to get conclusive results about how the business should be valued and split.
“It is the single most important thing to do when starting a business,” says Barrett. “It’s the easiest place to make a lot of mistakes if thoughts are not put on paper right up front.”