Little Shop Of Horrors: Dealing With Your Business In Divorce

 

If you are a small-business owner, dealing with your business in your divorce could send you spinning into a scene from Little Shop of Horrors — except, instead of a carnivorous plant wrecking havoc on your business, all your attorney and your soon-to-be-ex do is cry "Feed Me!" — Cash, that is, and lots of it.

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The family business is often the largest marital asset. Worse, family business owners usually pour their savings into their businesses and secure business loans against their own property or guarantee. When divorce looms, one spouse develops SBLS (Sudden Business Losses Syndrome) and the other spouse develops SYTS (Sudden Ivana Trump Syndrome). That is, one spouse thinks the business is worth nothing and the other a whole lot of something. They reach a standoff and fight back and forth over whose value is "right" until one spouse caves in or their judge picks a value at, what seems to be, random. No one wins, except the attorneys and their pocket books.

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How can you avoid this scene and deal with your business effectively? Here are some suggestions:

 

Determining If Your Business Is Marital Property

 

First, decide what it is.

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The family business is often not only the largest asset in the marriage, but also the family's main source of income. The family may have loaned the business certain assets (e.g., a vehicle) expecting to receive a return on the investment, just as one would expect with any property investment. But the business may also generate the family's income stream, such as through a salary in addition to repayment for loans.

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Your decision will drive the division method in your divorce. If you call the business "property," as you might for a business that makes money with tangible assets, like an apartment complex, then it is subject to the "equitable" or "equal" division rules for property division. If you call it "income," as you might for a business that makes money with intangible assets, like a lawyer's practice, then it is subject to the alimony award rules.

Merely semantics is not. Most states award each spouse one-half of the marital property. However, not all states award each spouse one-half of the other's income as alimony. Therefore, when a business is both property and income, like a retro ice cream parlor with top-notch appliances and cash to pay salaries to boot, it is important to segregate the property from the income when dividing it to avoid a double dip. That is, without careful segregation, you could divide the entire business as property and then award the nontaking spouse alimony based on the taking spouse's income from the already-divided business. See, e.g., McCallister v McCallister, 517 NW2d 268 (Mich Ct App 1994).

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Next, Choose Your Valuation Method

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Choose wisely. Choose the wrong method, and you could overvalue the business and shell out more cash to your ex than due, or undervalue it and lose your credibility, or pay more to your expert business appraiser than the business is worth. At a minimum, the valuation should examine the business's assets and liabilities (its book value), earnings history and potential, dividend and salary capacity, goodwill and other intangibles, industry, economic environment, stock sales, comparables and performance during the marriage. See Rev Rul 59-60.

But, no surprise, divorcing spouses and their attorneys have a remarkable capacity to make the difficult even worse. For business valuations, this means choosing a method that focuses on certain factors at others' expense to generate the value most favorable to their position.

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Finally, Get Creative

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Divorce for business owners requires some creative thinking and serious problem-solving. Fortunately, at Pinnacle Family Law, we are familiar with the way courts see businesses and business valuations. From our offices across the Great Lakes Region, we provide business owners with out-of-the-box solutions. Get effective help. Get a free consultation at 248-305-6484.