Five tips for handling a business during a divorce
Nobody gets married thinking they're going to get divorced, and they don't start a business thinking it's going to fail.
Nonetheless, 50 percent of all marriages end in divorce, according to the American Psychological Association.
Navigating a divorce is difficult enough on its own. Add a shared business to the tumult, and it’s a recipe for disaster.
But there are steps that can be taken to mitigate one of the most difficult times in a person’s life.
Even if you think your marriage is going to last and you work well together, circumstances are unpredictable.
Here’s what to do if you own a business with your spouse and decide to divorce.
1. See a marriage counselor
Those beginning the process of ending a marriage may find themselves resentful and angry. They may have disparate narratives of how things have gone, and it’s natural for unresolved feelings to color interactions between separating couples, said Patrick Hughes, a licensed professional counselor with a practice in East Pennsboro Township.
Because feelings are so charged, divorce can be a hasty decision, according to Hughes.
“It may feel really good to go with the strong feelings and make strong moves and just move away and do something desperate. It still isn’t necessarily the most grounded or logical move,” Hughes said.
Before anyone gets a divorce, couples counseling is often recommended, said Hughes.
Even if the marriage isn’t salvageable, counseling is still useful.
“The really successful divorces that I’ve seen come from individuals who are willing to sit with their partner and explore why this long-term plan that they had both decided on now is looking like it needs to shift,” Hughes said.
2. Manage conflicts
Divorce is expensive.
The average contested divorce costs between $15,000 and $30,000, according to Forbes.
Most of that is spent on legal fees. Each spouse will have his or her own attorney. And if a business is involved, they’ll need at least one financial expert.
But if they can’t stop fighting and both of them need their own financial experts, the cost of business valuation alone would probably exceed $25,000, according to Sherry Ziesenheim, a forensic accountant at Boyer & Ritter LLC, an accounting firm in East Pennsboro Township with offices in Carlisle, Chambersburg and State College.
Ziesenheim recommends using a single neutral expert, which could keep the financial expert fees as low as $12,000, Ziesenheim said.
Having organized, clean tax returns, financial statements and bank statements can also reduce costs.
“The more organized you are, the more reasonable you are, the easier it’s going to go,” Ziesenheim said.
3. Get a fair market value for the business
Valuing a business by its fair market value – rather than the book value from its most recent tax return – is a growing trend.
Fair market value is the price a business would fetch in a hypothetical sale. It can change over time depending upon a variety of conditions, such as industry conditions and the economic outlook.
Book value, or equity, is the historic cost basis of the business, which is derived by looking at the balance sheet – assets minus liabilities. The balance sheet serves as a snapshot at a given point in time of the historical activity of the business, Ziesenheim said.
But, she said, “Going by the book value on the last tax return may not be a fair indication of what that business is worth now or it may be inflated.”
She advises her clients to have their business’ fair market value be determined by a certified valuation analyst or an accredited business valuation expert.
If one partner plans to stay in the business and one does not, in theory one person is buying the other person out. The price will be driven by how the business is valued and how much is being bought out, Ziesenheim said.
4. Be patient
The average length of a divorce involving a business is about one year, Ziesenheim said.
“I’m aware of negotiations being completed in as short as a week, or as long as six years, but those are rare,” Ziesenheim said.
Sometimes the two sides settle out of court and sometimes they end up in a divorce master’s hearing, according to Engle. A divorce master is an attorney appointed by the court to try to resolve contested divorce matters such as equitable distribution and alimony. A master conducts a hearing or a settlement-oriented conference to help parties come to a resolution.
The length of the process and whether it goes to a divorce master is also driven by the extent of the conflict, according to Ziesenheim.
5. Cut your losses
Most of the businesses that Ziesenheim looks at, even in divorce, can be a little careless when it comes to reporting financial matters like cash.
“Especially if it’s a cash business, they’re not telling the IRS everything that they’re making,” Ziesenheim said.
For owners who haven’t done everything by the letter of the law in terms of financial reporting – which can include payroll reporting, income tax reporting and sales tax reporting – their hands may be tied when they negotiate the value of the business during a divorce.
If the couple hasn’t reported all of their earnings, they can’t complain about that unreported money not being used in valuing the business during the divorce, Ziesenheim said.
“Do everything by the letter of the law and you won’t have that issue. But if you haven’t, then you need to understand that you’ve now accepted that you don’t get to fight about that,” said Ziesenheim.
If the unreported money does come up in divorce proceedings, the judge may have an obligation to report the unreported cash as income tax fraud, said Ziesenheim.
Most of those types of divorces are going to settle out of court, according to Ziesenheim.