By Brittany A. Brown
– No one ever plans to get a divorce, but it is a reality nearly half of couples face. When a business is involved, an already difficult situation quickly becomes more complicated. A business is often a couple’s largest asset, and when both sides do not agree on how to value and divide the business, the couple faces the prospect of a long, expensive battle.
When the marriage is going well, preparing for the possibility of divorce and division of business assets can be uncomfortable. Though it can be awkward, the financial and emotional cost of not doing so can be devastating.
If you are a married business owner, the following five tips can reduce the potential for serious disagreements and added stress during a divorce. Even if divorce never happens, implementing these sound business practices will always be a wise choice.
Ensure accurate, timely bookkeeping. Keeping financial documents correct and current is a good business practice regardless of the circumstances, but during a divorce, everything comes under heightened scrutiny. Make sure all payments – especially cash – are recorded and expenses are categorized correctly. If you try to update or change records during divorce proceedings, it will not look credible. What’s more, ultimately arriving at a value for the business will be incredibly difficult without the proper supporting records. More on that later!
Maintain up-to-date accounts receivable. Your accounts receivable are an asset of your business, but during the normal course of business, it’s possible that you will end up writing off a portion. Every quarter, or on a cadence that makes sense for your business, review your accounts receivable, attempt to collect on delinquent accounts, and determine which outstanding accounts will be written off and by what criteria. Excessive write-offs around the time of a divorce will appear suspicious.
Avoid paying excessive personal expenses through your business. In some lines of business, meals and entertainment are expenses that are deducted from revenues or reimbursed by the business. During a divorce, questions can arise about whether these were legitimate business expenses or for a spouse’s personal benefit. The important thing is to be consistent. Avoid contentious debates by not co-mingling business and personal expenses and keeping documentation for business expenses. If a purely personal expense is paid, properly charge it back as compensation. Mixing the two is a practice that can complicate matters and cause unneeded headaches down the road.
Compensate each spouse for their contributions. There are instances in small business ownership where one spouse draws a salary, but the other makes contributions that go uncompensated. In better marital times, the unpaid spouse may view this as for the greater good of the business, but these feelings will likely change during a divorce. In hindsight, the unpaid spouse recognizes that their efforts for the business had monetary value. For these reasons, married business owners will find it beneficial to have defined roles and an agreed-upon compensation plan for each spouse.
Work with a trusted, credible business valuator. Arriving at an agreed-upon value for the business is one of the most contentious aspects for divorcing business owners. Spouses often have differing ideas about what their unique personal contributions are worth, and this leads to vastly different opinions and deep divisions over a business’ perceived value. For example, one spouse might believe that without their industry relationships, a business would be nearly worthless. The other spouse may believe any intelligent businessperson could step into that role and carry on those relationships with the business operations in place.
Engaging a credentialed business valuator will reduce tension and disagreements – and may even save time and additional legal fees in the long run. He or she will have training and experience in arriving at an accepted business value using standards and practices that can be recognized legally. And, if the previous four recommendations have been followed, it will be much easier and faster for both parties to come to agreement. In some instances, both sides jointly select a business valuation professional. In others, where each spouse has engaged a business valuation expert, the two may be able to confer and agree on a value, saving the significant costs as compared to a contested trial to determine the value of the business.
Like a marriage, a small business takes a lot of hard work to be successful. The end of a marriage doesn’t necessarily signal the end of a jointly-held business. With proper planning, sound business practices, and support from the right professionals, a fair and equitable resolution is possible.
This article was originally published in the August 2022 issue of St. Louis Small Business Monthly magazine.
Brittany A. Brown is an associate at Carmody MacDonald law firm in St. Louis, concentrating her practice in divorce and family law. Brittany can be reached at [email protected] or 314-854-8600. For more information, visit carmodymacdonald.com.
This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely upon advertisements.