As a professional family law mediator who is also an attorney and a Certified Divorce Financial Analyst (CDFA®), I have worked with many couples over the years who are business owners. If you are a business owner and going through a divorce, then there are some important things that you should know.
Situations are always going to be different, and it’s certainly going to depend on whether just one or both of you are active in the business, and what you want to do with the business moving forward. Here are some of the things that you should know about being a business owner and divorce.
Your business can be both an asset and your income.
I see a common confusion come up among my clients who are business owners. They’ll say to me, “Well, my business is just how I earn income. If I don’t have my business then I don’t have any income so my spouse should just let me have my business.” Now what kind of business you have can certainly play into whether or not your business has a value to it as an asset, and I’ll discuss that more next but the important thing to know is that your business can be both an asset (or even a liability) that could be divided, depending on whether it’s community and/or separate property and it can be your income (and often your only source of income).
The differences between the two is that as an asset it may have a value on it that you could sell it for and if your business is community property then that value would be included in the division of community property and either you may have to buy out your spouse (either now or in the future) or you and your spouse have to determine how you want to continue owning it jointly.
Additionally, if you work in your business then your business also probably provides you with your source of income and that income can be considered for support purposes (child support and/or spousal support). This may sound like double dipping, but it’s not because the value of the business as an asset is the idea that like a home or a car, you could potentially sell your business, and someone would pay you for it and the income is what you earn when you own the business.
There can be some businesses that, of course, don’t have a value because they couldn’t be sold. If your business does, then you will have to consider both it as an asset and as your income for support purposes.
Business owners and divorce: business valuations and income for support
If you own a business and are going through a divorce, then you are most likely going to need to hire a business valuator. They can look at your business and the financials and determine what the value of the business may be.
There are multiple ways to value a business in a divorce, and a certified business valuator is going to be able to discuss those with you. As a divorce mediator, I am not a business valuator, and so I will always refer my clients to someone who is so that they can make sure they get the information necessary for us to have our discussions in mediation.
The person who completes the business valuation should also calculate income for support purposes since as a business owner your income is not as easy to calculate as if you were a W-2 employee. This is because as a business (and I am one myself, so I know this) you can write off many expenses through your business that while legal for the IRS are not always 100% business expenses. For instance, you may be able to write off your phone, internet, auto expenses, travel etc. and while yes you may be using these items for your business, they may not be completely business only.
Additionally, as a business owner you may choose to keep a certain amount of income in your business or reinvest it. However, that doesn’t mean that you couldn’t access to these funds if you wanted. There are certainly some circumstances where your business may not have a value beyond yourself if you are a service business, such as a solo attorney or consultant. In that case there may not be any way for you to sell your business and the only value is the income it produces; however, I still recommend that my clients in these cases speak with a professional business valuator so that can be determined by someone who knows.
Your business may be community property and/or separate property.
If you owned your business prior to getting married, or if it was inherited or gifted to you during the marriage, then your business may have some separate property to it. That’s another place where a business valuation is going to be important, because they’re going to need to determine not only what the current value is, but what the value of the separate property may be.
If you started your business entirely during the marriage, however, then absent some specific situations it is going to be community property and could be split equally. Now for many business owners, me included, it would be very difficult to pay out the value of the business to their spouse without selling the business – but there are option, which I will discuss next.
It is important to discuss with your attorney and mediator about the background of your business so that it can be determined whether there is separate property that needs to be considered. Additionally, if you have a prenup that details anything about the business, you’ll want to make sure to provide a copy of that to your attorney, mediator, and the business valuator.
There are options for business owners and divorce.
When going through a divorce as a business owner, there are different options that you and your spouse can discuss with your mediator to decide what makes sense for you both moving forward. As discussed above, there is both the business as an asset, and the ownership of it as well as the income that comes from the business.
In terms of the ownership, one of the options that I’ve had clients choose is where one person buys out the other, based on the determined valuation, and then they keep the business entirely. The buyout could occur with an offset from other assets, such as a home or investments or it could happen with cash or even over time if both parties are agreeable to that.
In other situations, either the business owner or both parties can’t (or don’t want to) buy out of the interest, and instead they choose to continue to own the business jointly, or even have some interest that goes to their children, if they have any. In these instances, it’s important to determine what the ownership percentages will be moving forward, what that means for the actual day-to-day running of the business, and how they will deal with a situation in the future if one or both want to sell the business.
Making sure you have a skilled mediator who can understand and handle these conversations is important, so that you don’t end up in a conflict down the road. What option is best for you is going to depend a lot on what the participation in the business looks like. I have had clients where the business was co-owned and both spouses were active participants and wanted to continue that, however, they were making for a toxic work environment for their employees by both continuing to own the business. Other times, although the business is community property, only one of the spouses has been the one working in and on the business and the other spouse may have little to no involvement. In that case, it may not make sense for them to continue to have ownership in the business.
Another situation that comes up often is that the business owner spouse is paying the other spouse a salary through the business. This may be because they are working in the business, or may be a way to maximize income and retirement contributions for the family. Either way, there can be some benefits to maintaining the other spouse as an employee for things such as income, retirement, and health insurance. While this can be a beneficial situation for both of the parties it’s important to discuss with your mediator what this looks like and understand how that might change in the future and whether you want to continue to have that connection with your soon to be ex-spouse.
Business owners and divorce: how to protect your interest.
For business owners going through a divorce, a prenup is something to think about if you get remarried – and certainly for those that are not yet married and are business owners.
A prenup (or premarital agreement, as I like to refer to them) can protect your interest in your business as separate property, even during the marriage, and/or set out certain ownership that your spouse may be entitled to over time. This is a way to make sure that you don’t end up in a situation where you have to buyout your spouse in a business, when you can’t afford to do so.
If you are a business owner and thinking about getting married, you should talk with a mediator or attorney who is knowledgeable in drafting prenuptial agreements, and can advise you on how to handle that.
If you are a business owner and divorce is imminent, make sure that you talk with a divorce professional who understands the complexities of business and divorce to help you and your spouse navigate this issue.
At West Coast Family Mediation Center, our mediators all have their law degrees, most are CDFA®s, as I am, and we have experience working with the issues that arise when you and/or your spouse own a business.
Divorce and financial planning should go hand in hand for business owners. Contact West Coast Family Mediation today for a personalized, confidential consultation.