Do you own a business? Want to protect it?
If you are a married business owner, the following 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.
1) Get a prenuptial Agreement;
2) 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. DO NOT update or change any business records during your divorce proceedings before judgment has been entered. Supporting documentation is necessary for a proper and accurate valuation of your business during a divorce. If it is a separate property business (i.e. started or acquired prior to the date of marriage or acquired as a result of an inheritance) you have a vested interest in ensuring that calculating the community's interest in this business is accurate. Revere the paper trail!!
3) 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 timeline that works for your business, review your accounts receivable, 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 raise a red flag to the other party's attorney and appear suspect.
4) Avoid paying any 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 raising any red flags and heightened scrutiny by not co-mingling business and personal expenses and keeping documentation for business expenses. Revere the paper trail!!!
5) Did your spouse contribute to the business? Perhaps helped build the business? Had administrative or office-type duties? If the business grew as a direct result of your spouse’s involvement, it is likely that this will be taken into consideration. Compensate your spouse for their contributions. There are instances in small business ownership where one spouse draws a salary, while the other spouse makes contributions that go uncompensated. In similar instances that spouse has no other independent source of income or employment. During the marriage, the spouses may view this uncompensated work as for the greater good of the business. Feelings change when a couple is going through a divorce and/or making end-of-marriage decisions. The unpaid spouse (or his/her attorney) will decide their efforts for the business had monetary value. For these reasons, married business owners will benefit from having defined roles and an agreed-upon compensation plan for each spouse.
6) Get a prenuptial agreement. Oops. Did I already say that?
7) If you find yourself going through a divorce, use a 3rd party, trusted, credible business valuator. Don't haggle with your spouse (or your spouse's attorney) about how to value the business or to value your spouse's share or the community's interest in that business. It's not worth it. Arriving at an agreed-upon value for the business is one of the most contentious aspects for divorcing business owners. Spouses (and their attorneys) will have different 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 (or should) reduce, if not eliminate these disagreements, and likely save time and additional legal fees. Yes, the business valuator will also charge for their time, but isn't that worth it to get the valuation done right the first time and to feel secure that whatever is determined to be the community's interest in this business is based on a thorough review of the business records by a qualified neutral expert (rather than by opposing attorneys)?