Most of you would agree that divorce is probably one of the most difficult and emotional circumstances any individual can face in life. The issues are complex and can be time consuming to resolve. When it comes to a divorce, marriage partners, who are also business partners, have challenges that other divorcing couples don’t have. In addition to the traditional issues of child custody, division of marital assets and support arrangements, they must also address issues involving ownership structure and valuation of their business, and business planning for the future.
In general, and absent of any pre-nuptial arrangements, a divorcing spouse is entitled to half of whatever growth there has been in the net family assets from the date of marriage to the date of the separation, and these assets would obviously include any business interests. In addition, depending on the levels of each spouse’s income, there may be requirements for one spouse to contribute a portion of their income as child or spousal support after the separation. A business valuation specialist provides expert business valuation analyses for all financial matters relating to family law proceedings. The analyses include valuations of business interests and other assets for the determination of Net Family Property and calculations of income to determine appropriate levels of child and spousal support.
Family businesses can be especially difficult to settle in matrimonial disputes as the divorcing spouses may have a wide range of involvement in the business. In one instance, one partner is usually integral to the business, while the other acts in a more supportive role. In these circumstances, there tends to be a high level of uncertainty for the non-active spouse. Education and information on the business will become key factors to resolving these matters. Alternatively, both spouses may be active in the business with both in key positions of the company. In this scenario, the challenges are very different since the resolution of the continuing business relationship is the most critical factor to all involved. Working together and dealing with staff can be very stressful, especially in the early stages until a decision is reached as to who will continue with the business. In either situation, it is vital that the parties quickly identify the nature of their situation and act accordingly.
It is important to remember that the business interests are often the “Golden Goose” that has provided the divorcing couple with their lifestyle and net worth. Under most circumstances, the business interests represent the most valuable asset that the parties own, so both spouses should have the same objective of ensuring the continued success of the business. Sadly, too often the stress of a divorce takes its toll on a business because the owners’ attention is distracted from company matters, which ultimately begins the company’s slide downhill. Also, there are occasions when large settlements are awarded that can literally kill the business. In either case, both parties end up losing. Couples must always take steps to avoid killing that Golden Goose.
Given the above, there are a number of recommendations I would make to a client faced with the unfortunate circumstances of a marital separation:
- Business owners must ensure they are upfront about everything — especially in circumstances where their spouse has little knowledge of the business interests. A lack of open communication breeds uncertainty and misconceptions that generally lead to a more time consuming and expensive process.
- Quickly develop an understanding of the critical needs, expectations and desired results for both parties. The sooner the parties understand each other, the better they can develop a negotiated solution.
- Try to set the emotion aside and treat the settlement as a business transaction. Emotion can create unnecessary conflict, which leads to a more costly settlement. Considering such strategies as a cost-benefit analysis would help to ensure the unnecessary wastage of net family assets.
- Work together and consider, for example, the joint retention of experts such as a Chartered Business Valuator. Lawyers will generally work together to identify an expert they are both comfortable with and overall these steps can significantly lessen professional fees.
- Consider alternatives. While some options will not always work —depending on the circumstances of the marital breakdown — there are several options to litigation, including Collaborative Family Law, Mediation and Arbitration that may reduce and/or help with some of the issues I’ve identified.
There are no simple solutions when dealing with a divorce and, as I mentioned earlier, a business interest only makes the situation much more complex. However, with my suggestions in mind, divorcing business owners and their spouses can hopefully move on a little easier.