You and your spouse may want to consider a Collaborative Divorce if you own your own business. Why?
1. Minimize disruption of business operations.
Sometimes when business owners are divorcing, the business’ employees will find out there is a pending divorce and then become fearful that they will lose their job for fear that the business will be sold or go under because there is a pending divorce. The employees do not know the details behind their scenes, therefore, all they can do is imagine worst case scenario for themselves. The last thing a business owner needs during a divorce is for profits to decrease and their business to decrease in value due to employees’ perceived threats that they will be adversely affected by their boss’ divorce.
Benefit of neutral financial professional and controlling the process/narrative. In a collaborative divorce, the parties work with a neutral financial professional to address the financial aspects of the divorce. In my experience, the financial professional typically advises the parties to hire a business appraiser to value the business. A qualified business appraiser will have the education, training and experience to value the business. Every business is different; therefore, it is best to hire a business appraiser with experience appraising the type of business owned by the parties.
For example, I had a client who owned a lucrative veterinary practice which employed a handful of other veterinarians and assistants. My client spent years building his practice. We hired a veterinarian who resided in another state to prepare the business valuation because this veterinarian also happened to be an accountant who specialized in appraising veterinary clinics when they were sold. Although this was not a collaborative divorce, the parties agreed to use one appraiser to value the business. If they had each hired their own appraiser to value the business, they would have incurred additional costs and then there possibly could have been a conflict regarding the business value due to 2 professional opinions.
Note: In Texas, if your divorce is in litigation and there are 2 business appraisals, the judge is required to pick one appraisal to determine the value; the judge is not allowed to average the 2 appraisals—another incentive for parties to agree on the business appraiser.
In order to ensure that both parties are treated fairly, the best course of action is for the parties to jointly hire a well-qualified business appraiser who will be fair and holds no bias to either spouse.The parties can also discuss with their attorneys and their collaborative team how to proceed with communicating or not communicating to the business employees regarding the divorce. A plan for communication to the business employees will reduce any disruption that could occur when the water cooler chatter occurs in the break room.
2. Customized options for dividing up property when a business is part of the assets.
Unlike a marital home which can be sold, and proceeds divided between the parties for each to start over purchasing a new home, a business typically cannot be quickly sold and usually the spouse running the business has no desire to sell the business. In my experience, the business is usually one spouse’s livelihood in which they have invested their blood, sweat and tears.
Benefit of the collaborative team. In a collaborative divorce, the parties work with their individual attorneys, a neutral financial professional and a neutral communications facilitator. The communications facilitator is a mental health professional who is specifically trained in collaborative divorce to assist the professionals and parties with their communication. The goals for the spouses and professionals in a collaborative divorce is to reach agreements which are interested based- in other words, reach a resolution that works for both spouses. If the spouses were forced to sell the business, I expect one spouse would be happy to receive some cash, while the other spouse would find themselves unemployed and disappointed with their situation in life.
In my experience with business owners, the spouse running the business is typically awarded all of his/her ownership interest in the business, while the other spouse is compensated for their half ownership in myriad of ways. If the business is worth $1 million for example, the spouse not running the business would typically receive $500,000 for their share of the business. If there happens to be a bank account with $500,000, an easy solution would be to award the $500,000 bank account to the other spouse. Many times, I have seen that there is not sufficient cash to simply award the non-business manager spouse a lump sum of cash because the parties have invested much of their available cash back into the business. Conversely, if the business withdraws a lump sum of cash to pay the other spouse, the business may suffer.
Are There Options? Options for parties to consider are the business owner paying the other spouse over a period of time with monthly payments and the total balance owed to the non-business owner spouse is collateralized with other assets and life insurance on the business owners’ life to ensure the spouse who is owed funds receives their portion. Another option may be to agree that when the business is sold in the future, the proceeds will be divided. Every situation is different. There is no one-size-fits-all solution to addressing a business in a divorce. The collaborative team can help the parties identify their interests and find a solution to properly divide the assets in a divorce when a business is one of the assets. In a non-collaborative divorce, the parties may find it more challenging to create a property division where a business is involved without the benefit of a team of collaboratively trained professionals working together on behalf of the clients. The collaborative teams’ goal is to find a solution that works for both parties.