|Family Business: Avoiding Divorce Disaster
When there is a family business involved in a divorce proceeding, there are some important items to consider. Here are some dos and don’ts to think about.
December 17, 2009
Surviving a divorce is difficult enough for the couple, but when a family business is involved you are trying to keep that entity alive as well. You can avoid damaging or destroying the business by seriously considering the following list of dos and don’ts.
Don’t make any big changes during or in contemplation of divorce. “Act in the best interests of the business. Think twice before you make any major decisions that would adversely affect the cash-flow. And if you have cash, it is not the time to commit business resources to expansion. Don’t make any big changes.” says Brenda Keen, Houston family law attorney. Of course, if there is an opportunity to land a new big client for the business, then do so. Keen advises her clients, “Act as a prudent business manager and you won’t have to worry about defending your actions.” This is, of course, sound advice at any time for a business concern, but is especially important in divorce-related proceedings.
Don’t drain the business. Norma Trusch, a Houston collaborative family law attorney, has seen cases where the managing spouse was running the business down during a non-collaborative divorce in an attempt to have the business appraiser show a lower valuation. “The opposing attorney figured out what was happening and went to court and the judge appointed a receiver to manage the business. This is not a good prospect because there’s always the risk that the receiver is one of the judge’s cronies who really does not understand your business and will charge huge fees in the process. You want to avoid this situation.”
Don’t cut costs in hiring the business valuation analyst. A few years ago, I was a neutral financial in a collaborative divorce in which the clients didn’t want to pay for a formal valuation of the family business, which was solely managed by one spouse. The ability to afford a proper valuation was not an issue. The couple hired a business valuation analyst to meet with them and talked about the business. In their attempt to save money, the couple did not give the valuation analyst complete information. After the interview, the couple agreed between themselves upon a value of less than $100,000. Three months later, the business spouse sold the business for $800,000. In this case they were still in the divorce process and could renegotiate the tentative property settlement to reflect the true value of the business. But a guesstimated valuation can go both ways — an advantage or disadvantage to either spouse.
Don’t try to influence the business valuation. The owner in control of the business might be tempted to manipulate the business in hopes of getting a lower business value. Keen advises her business owner clients to “do business as you have always done because it will be apparent to the valuator if there is a change in the pattern.”
Don’t interfere with the conduct of the business. In traditional litigation, the out-spouse may wish to impose injunctions prompted by the perceived need to see how the business is run. Keen advises her out-spouse clients in any divorce process, “We don’t want to interfere with how the business has been run as long as the business-manager spouse is not running the business into the ground.”
Do share critical information with the out-spouse. When the business-manager spouse keeps information from the out-spouse, it can push the out-spouse and his/her attorney to seek information from other sources. This can create problems by giving the impression of an impending crisis in the business. “And if the business is struggling anyway, contacting creditors and suppliers can cause credit to dry up and push the struggling business to collapse,” Keen points out.
Do seek privacy. These days many businesses are walking a tight rope to stay in business. In adversarial litigated divorces, opposing counsel can use subpoenas to get bank records and depositions to get financial information. This can be risky for the business. Trusch explains, “the fact that there is a divorce can affect the managing spouse’s business credit. When their banker learns of a pending divorce, there is increased concern about the stability of the business and the ability to meet debt obligations.” The potential result can be the beginning of a downward spiral that could have been avoided had the divorce been kept private.
Do carefully choose the best divorce model. Litigated divorces are adversarial time hogs. Couples in litigated divorces do not maintain control of their divorce. On the other hand, the collaborative divorce model allows the couple to retain control of their divorce, the time commitments and the duration. In all my collaborative cases involving business owners, privacy is a top reason for choosing the collaborative model. All of them wanted to avoid subjecting their colleagues or partners to depositions or testifying in court. The collaborative divorce process is all about privacy.
Another advantage of the collaborative divorce process is the ability of the parties to choose the most convenient times for joint meetings. Trusch comments, “In a litigated divorce, the parties could spend hours and even days at the courthouse, taking the business owner away from work at times and for periods that may be completely disruptive to the business. Collaborative meetings are set at the times that are convenient to all of the parties and on a timetable that makes business sense.”
In the collaborative divorce process that involves a business, the couple and the professionals brainstorm about ideas. Many times the challenge is to find enough other assets in the estate to offset the business value. Keen explains, “No one wants to sell the business. We look for solutions to carve out a way for continued interest with protections for the minority shareholder in which the business manager can continue to manage the business in the way that results in the business’s success.”
Collaborative teams can come up with arrangements that the court is not capable of ordering. The court does not have the power to create a solution by contract. Whereas, in a collaborative setting, the team can call in business’ lawyers to help generate creative solutions that spring out of collaborative team-brainstorming sessions. Couples have a much better chance of working this out in a collaborative divorce than in a litigation case settlement. It is simply because, instead of trying to force the other side to do what one wants, the couple can recognize their shared goals and work together to achieve them.
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Tracy B. Stewart, CPA, PFP, CFP, CDFA specializes in family law litigation support in Houston, TX. She helps clients protect their wealth during property settlement negotiations. She is a member of the AICPA Personal Financial Planning and the Forensic and Valuation Services sections. Stewart is a board trustee for the Collaborative Law Institute of Texas as well as on the Executive Board of Texas Society of CPAs. You can contact her through www.texasdivorcecpa.com.