Divorce can spell disaster for a small business.

What to expect during a small business divorce.

For small business owners, a divorce can affect the entire course of the company. Growth might be stalled, day-to-day matters are often put on hold and the entire operation could be compromised. What’s more, divorce can not only affect the pair separating, but also any business partners and employees involved.

If you or your spouse owns a small business, several questions come to the forefront: How will my business be valued? Will I have to sell? How much money am I entitled to? While the process may seem overwhelming, knowing what to expect and how to evade certain obstacles will lessen the burden of divorcing with a family business.

If you have a prenuptial agreement or other protocol.

A prenuptial agreement can save you a lot of headache where a small business is involved by predetermining the distribution of assets in a divorce.

If there are multiple business owners, the business partnership agreement or shareholder agreement can designate the process of a buyout or valuation of interest if one of the business owners suffers a divorce. Although this agreement may not bind the family court, it does exhibit an effort to minimize disruption to the business and existing partners that the court would likely respect.

Small business valuation.

As with other assets in the divorce, your business will likely be valued. This means that a financial expert will be required to review all of the books and records of the company. He or she will ask questions about business practices and expenses and financial documents must be produced.

Because two experts are frequently utilized, one for each party, business valuation can result in significant costs. Hours are shifted from the business to gathering information for the valuation. In addition, business growth and operations could be halted because if the business does improve, the value of the business rises and additional cash must be paid to the spouse.

Determining the level of spousal financial support.

The financial impact the divorce will have on the non-owning spouse and his or her continued security is also a top concern. This is where the business’ independent accountant comes into play to coordinate full disclosure of business operations. The CPA can act as the mediator between both the company’s in-house accounting staff and the experts involved for the divorcing parties. Three of the most critical elements in determining the level of financial support as well as the value of the business are the business’ historical economic benefit directly and indirectly to the owner or owners engaged in the divorce, current financial condition and future goals.

Tips to surviving a small business divorce.

  1. Engage an independent financial expert. Lacking a prenuptial or partnership agreement, parties can agree to hire one joint financial expert to value the business in order to expedite the process and reduce costs. The valuation will also move faster if the books and records of the business are organized and easily available.

  2. Agree on a settlement. A settlement can often be structured with payments made to a spouse over time to avoid the sale of the business.

  3. Be transparent. Open communication is absolutely critical during the discovery process in order to keep the proceedings moving but to also avoid huge costs and even fines. Don’t make any significant changes to your business, such as modifying the business model to decrease revenue. Questionable changes come up in court and put you at risk of losing your business.

FINAL_JayIf you are a small business owner or the spouse of small business owner and facing divorce, contact Jay Babbitt and your team at Babbitt & Dahlberg today to schedule a consultation.