By Tammy J. Arquette, Esq.
According to the American Psychological Association, approximately 40 to 50 percent of married couples in United States obtain a divorce. The divorce rate is even higher for subsequent marriages.
A divorce proceeding can have a significant impact on the financial and emotional well-being of the parties and their children, but if one or both of the parties are also a business owner, the business can be significantly impacted. The significant impact on the business can include financial disruption, discord amongst partners and employees, imposition of third party experts to review books and records and value the business, and the potential requirement for the sale of the business.
The Domestic Relations Law provides that assets that are acquired during the marriage, including businesses, be valued and equitably distributed. Further, marital asset may also include the appreciation in value of an otherwise separate business interest.
One or more financial experts, including but not limited to, valuation experts, accountants and business attorneys, may be required to determine the value of the business, the income stream of the business and the parties’ contributions to the business. In addition to the cost of retaining these experts, the business may also experience loss of production as employees and the business owner are engaging in the time necessary to cooperate with the experts and producing the various documents and records necessary for the valuation.
Not only will the valuation of the business be necessary for the purposes of equitably distributing the asset, but the methodology in how to calculate the income for the business owner for spousal support and child support purposes may also be necessary.
There are several steps that a business owner can take to avoid or minimize the impact of divorce on the business. The parties can obtain a pre-nuptial agreement if the business was already owned prior to marriage. The parties can obtain a post-nuptial agreement which is signed after the date of marriage, which agreement could specifically address how, if at all, the business will be valued and/or distributed in the event of a divorce.
If there is more than one business owner, a business partnership agreement or shareholder agreement that contains a buy/sale agreement, may be prepared. Said buy/sale agreement may establish a methodology for a buyout or valuation between the owners in the event of a divorce or status change of an owner.
The parties can agree to sign a non-disclosure or confidentiality agreement to protect the sensitive information of the business and ease concerns of partners or other shareholders of the business regarding the intrusion of experts into the business operations and records.
If the business owner is concerned about the possibility of a divorce and there is no pre-nuptial or post-nuptial agreement, there are several steps the business owner can take to minimize the impact of the divorce on the business. The business owner should ensure that the business maintains good records and books that would make it easier for the experts to assess the value of the business.
The business owner should minimize the comingling of personal and business expenditures from the business. The business owner should make sure that he or she is paying himself or herself a good salary rather than using the business to pay personal expenses or providing the other spouse with an argument that family sacrifices were made to build the business.
The business owner may create a buy/sale agreement to define what happens to the business in the event of a divorce or any other owner status change. This could limit the spouse’s ability to acquire ownership of the business or voting shares in the business and it could provide the business owner and the business owner partners with a right to buy at a low and preset price the stock or asset of the business.
The business owner may obtain a whole life insurance policy that can be cashed in or liquidated to provide the funds necessary to buyout the spouse’s interest in the business. Further, if the business was owned prior to marriage, the business owners should get an objective valuation of the business as of the date of marriage.
Lastly, the business owner should choose a divorce attorney that has extensive experience with high asset and complex marital dissolutions, and has represented business owners, used forensic accountants and other financial experts.
Arquette is a matrimonial attorney at the Arquette Law Firm PLLC in Clifton Park.