How Will a Divorce Impact My Business? [SPONSORED]
We’ve partnered with the law firm of Szaferman, Lakind, Blumstein & Blader, P.C. to offer advice for what to do when a divorce may impact your business.
During a divorce, a spouse may seek an equitable interest (a court ordered, partial ownership, created in the interests of fairness given the particular circumstances) in the business. For the business owner, there are many issues that need to be considered and addressed.
The court system in New Jersey has very liberal discovery rules (which allow both parties to obtain relevant information and documents pertaining to a case). A judge may allow a party to have access to virtually any document pertaining to the ownership and value of the business. Any employee with knowledge of these issues could be questioned. Unless there is a Protective Order of Confidentiality, these documents and information will be public record for all, including competitors, to see.
Both parties should understand a business entity should be protected. A party may request a Receiver or Fiscal Agent be appointed to ensure the business is being run properly and not just drained of revenues for the benefit of one of the parties. A business owner needs to be aware this kind of appointment may happen.
As part of a business plan, there should be a buy/sell agreement for partners or principals. A predetermined method of a party is essential to avoid costly valuation issues. Though it’s not binding on a spouse seeking an ownership interest in the business, a court should find it relevant (but not determinative) of a shareholder’s interest in a small, closely held business.
Courts will try to determine the business’ “fair value” (not “fair market value”). This is appropriate when a closely help corporation is involved, with no ready market for its shares. Valuation relies heavily on the cash flow of a business. Then there are “add backs” (payments for pension plans, insurance, travel, auto expenses, etc.) to the calculation. This is to come up with the actual income of the titled spouse to determine figures for spousal support and the actual value of the shareholder’s interest.
An issue that shouldn’t be overlooked is taxes. The federal tax code allows for a tax-free transfer of assets or liquid funds as compensation for an equitable interest in a business. However, if a business owner sells his/her share of a business, it’s a taxable event.
How much of an equitable interest might the spouse get?
Typically 25% to 40%, though it could be more or less. Even if the business owning spouse started it prior to the marriage, or became an owner through an inheritance, the other spouse may seek equitable distribution of the appreciation in value of the business during the marriage.
It’s in everyone’s interests they be rational and reasonable in compensating the spouse who will no longer be involved with the business, but who has an equitable share of it. The ability of the business to function and generate cash flow must be protected, because it will support the family and the titled owner. The sooner the parties realize that the better. Once that realization is met, the divorce process should proceed easier and faster, to everyone’s benefit.