Divorce and the Business Owner

Divorce attorneys are often asked the following question: “I am thinking about getting divorced. I own part of a family business. What should I be doing?”

There are two questions to ask before answering.

Do you have a buy-sell agreement?

Talk of a buy-sell agreement among partners (and between family members when they are your partners) can be awkward, because most small business partners operate on the principal that trust is enough. Aside from avoiding a bitter dispute as to value in the event of withdrawal by one or more partners, a buy-sell agreement can be invaluable in a divorce proceeding. One purpose of a buy-sell agreement is to set a value of the business, and then have that value updated periodically, annually, bi-annually, or otherwise. By setting the value of the business, each owner’s interest is then known and has been contractually established. If a partner’s interest has been set contractually and then periodically updated by the firm’s accountants or by an outside accounting firm, then the value set in the buy-sell agreement can be the benchmark in divorce litigation for the value of the divorcing partner’s interest in the business. A partner’s interest in a business (family-owned or otherwise) is a marital asset, and the partner’s spouse is entitled to a portion of the value of that asset. A buy-sell agreement in which the value of the business has been set and then updated will in most cases allow the divorcing partner to bypass expense forensic accounting work. The divorcing partner’s interest has been established in the buy-sell agreement.

How far back does your business keep its financial records archived?

Many businesses operate on the premise that after seven years business records can be purged. That may not be practical in the event that one or more of the partners divorce. A partner’s ability to establish the date of acquisition value of his or her interest is crucial in a divorce proceeding if it preceded the date of marriage or if the interest was acquired by gift or inheritance during the marriage. The value of their interest as of the date of marriage, or as of the date of the gift or inheritance, is in most cases considered exempt from distribution in divorce. In that case only the post-marriage or post-gift or inheritance increase in value is considered to be an asset subject to division under an agreed upon or court ordered percentage. An existing buy-sell agreement can establish the date of marriage, or date of gift or inheritance value. If there is no buy-sell agreement, records must be available for the year in which the interest was acquired. A forensic accountant can then determine the portion of the partner’s interest which may be exempt from division in a divorce. Purging of older business records may result in the loss of crucial business records.

Divorce for the business owner can be complex and expensive. Following these two tips can help reduce the complexity and expense.