Business owners face unique challenges when going through a divorce. Here’s what you should know
A divorce can be emotional, painful — and expensive. And if you’re running a small business, it could have a significant impact on your cash flow.
Although research varies, it is estimated that anywhere between 40% and 50% of marriages end in divorce. A divorce can be emotional, painful — and expensive. And if you’re running a small business, it could have a significant impact on your cash flow.
If you own a small business, here are few things to consider:
Get your books in order
It’s important to make sure your books are as clean as possible. Many business owners I know mix too many of their personal and business expenses, usually due to sloppy bookkeeping. During discovery, an opposing attorney can request just about anything related to your business, and this could put you at a disadvantage during negotiation. Pennsylvania laws, in particular, can “tend to be on the liberal side” regarding what documents can be requested, according to Linda Kerns, a family law attorney based in Philadelphia.
“A spouse can request all the details of your business even if they don’t own the assets,” Kerns said. “When you go through a divorce, you’re putting a microscope on your business and on your accounting habits and if small discrepancies are found, they can blow up into bigger headaches.”
Consider an arbitrator
Both Kerns and John Zurzola, a divorce specialist and partner at Weber Gallagher in Philadelphia, say that arbitration — where you hire an independent attorney or judge — may be the best and most cost effective route for a divorce negotiation. Kerns says that in arbitration, all matters are private and not subject to reporting. Zurzola agrees that arbitration tends to be a smoother process and “hopefully” results in a more fair settlement.
“It would be beneficial to the business owner if a neutral arbitrator has knowledge in an industry, particularly if the business is technical,” Zurzola said. “Otherwise you’ll need to educate the court on how the business works, and this could lead to asset valuation problems.”
Your cash flow will be affected
Consider the impact that your divorce will have on your future cash flow. Whereas your business might fluctuate depending on the season or your projects and customers, a divorce settlement — particularly when there’s alimony or child support — requires a consistent payment being made.
“I often have clients that have challenges when it comes time to pay a monthly amount when their cash flow doesn’t always support that,” Kerns said. “It can also put a ton of pressure on a small-business owner, particularly when their business is subject to ebbs and flows.”
According to Kerns, one of the reasons cash flow becomes a challenge is that a business often gets valued during divorce proceedings, and the value of the business may contain noncash assets such as customer lists or a company’s reputation.
“If, for example, your business is valued at $1 million, it’s not all cash, and you have half of that to pay your spouse,” Kerns said. “So you may have to finance that amount … then you’re paying a loan back in addition to trying to run your business after a divorce. It can be very, very difficult strain.”
Think ahead when you can
No one goes into a marriage with the expectation that it will end in divorce. But regardless of the state of your marriage, it’s important to take steps in advance to protect your company’s assets — and even your business partners’ interests.
One of these steps is to have a buy-sell agreement with your partners. This is a legally binding document that stipulates in writing what happens when one partner dies, wants to be bought out, or experiences other significant events that may impact a business.
Doing this in advance creates a defined road map and significantly reduces any confusion when a situation — like divorce — arises. Most buy-sell agreements require that a business has insurance to cover the costs of these types of events.
“I find that divorces when there are [business] partners can be even worse because the partners are trying to go into the office every day and earn money, and they’re not too thrilled about dealing with lawyers and having the staff gathering information to turn over to attorneys,” Kerns said. “It’s a huge, huge distraction and could even personally impact their cash flow.”
Find the right attorney
The right attorney can ease what is for most people a very difficult — and emotional — experience.
Zurzola advises finding an attorney that has had a history dealing with divorcing couples when either both or one has a stake in a small business. He also recommends attorneys that have good networks of advisers, such as forensic accountants, tax specialists, valuation firms, and insurance professionals. Kerns agrees.
“The choice of a divorce attorney can be a very personal one because you’re putting a lot of trust in that person,” she said. “And remember that the more you hide or act like something’s not important, the harder you’re going to make their job.”
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