There are several related issues that may arise when one or both spouses own a business. New Jersey divorce lawyer and mediator Alison Leslie explains how to protect a business as an owner and how a business is divided if spouses are co-owners. She also discusses business valuation and the importance of hiring the right professional for the job.
Hosted by: Dan Couvrette, CEO, Divorce Magazine
Guest speaker: Divorce Lawyer & Mediator, Alison Leslie.
Alison Leslie is heavily involved with the New Jersey State Bar Association as a past chair of the Solo Small Firm Section. She served on the Family Law Executive Committee and is a member of the statewide Ethics Committee. Alison owned her own successful divorce firm for more than 10 years, and she frequently represents both the business owner and the non-business owning spouse in divorce. For more information about Alison and her firm, visit www.leslielawfirm.com.
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If somebody is a business owner, how can they protect their company during divorce – both financially and from unnecessary disruption from the other side's attorney?
Leslie: During the divorce, there needs to be a recognition that there should be as minimal a disruption in business as possible. Obviously, there is going to be some disruption on the business order side because divorce is stressful and emotional. However, the best way to protect this, as well as from any other unnecessary disruption from the other side's attorney, is to be open, honest, and forthright with the financial documents as well as the explanations of what your business does. The more open and honest you are, the best and the fastest results you're going to have.
You can also do things such as hire a joint expert, provide the documents to the expert, and limit the scope of the entire investigation. When I say limit the scope, figure out at your first meeting between the attorneys as well as with the expert exactly what you are looking at. Are you looking at one year, at three years, at five years? Is there a premarital component, or is the entire business marital? What specific documents are going to be needed in order to get you to that goal? The more specific a business owner is with the financial expert, the more tailored the explanation is going to be, and it won't be a fishing expedition.
Frequently you have issues where the non-business owning spouse's attorney doesn’t understand the business or doesn’t know the business. One of the easiest ways to do that is the two attorneys, the two spouses, and the financial expert meet at an initial meeting so that they all learn what the business is about, and they're able to determine what the scope is.
If both spouses co-own a business together, how will it be divided in a divorce?
Leslie: It's really going to be based upon a case-by-case basis. However, when both spouses co-own, and not necessarily own, but both work in the business, each spouse is going to have an intricate knowledge of the business – although they may not have the same knowledge. For example, one spouse may actually work the business and the other spouse may actually be in the office. The spouse that's working in the office may have more of the financial knowledge than the spouse who could be out in the field working, such as a landscaper. If one spouse manages the books for the landscaping company, that spouse may have more knowledge as to what the true financial picture is, as opposed to the other spouse who is managing crews and determining bids for obtaining new landscaping clients.
It really depends upon what are the roles that each spouse has. How will it be divided upon divorce? It depends what state you're in as well as how long the business has been owned. Is it a true 50/50? That depends; it depends upon how long both of the spouses have been working in the business. It also depends upon what is the true ownership interest in this business. There's one spouse listed as the president of the company but never steps foot in the company, if there is even a physical business. If it's simply a business that's on paper and has never been used for anything, but the spouse is listed as a vice-president for example, that depends upon what the business is and what each spouse's role within has been.
If somebody put their doctor or dentist spouse through school, are they entitled to anything during divorce? Is that medical dental license worth something to them?
Leslie: It is, and it really depends upon what state you're in. For example, in New York, that medical and dentist license does have an actual dollar amount to it and does actually have a value to it. However, in New Jersey, it is not valued; the actual license does not have a specific monetary value.
That being said, the spouse who put the other spouse through school would be entitled to reimbursement alimony – assuming that the spouse with the professional license is utilizing their license in their new profession as well as has shown that there's an increased earning history based upon receiving this degree. For example, if you put someone through medical school or dental school and they suddenly have a booming practice, and you're really dealing with a short-term marriage, then somebody absolutely would be entitled to what's called “reimbursement alimony.” And this would be an enhanced version of alimony that is to compensate the spouse based upon this enhanced earning that that person has.
However, if you're looking at a degree that a spouse may not be earning as much on, you may not receive that. For example, if you put someone through seminary school and that person is now purposing, not earning what they previously were earning, that is a reason that you may not receive reimbursement alimony. So, once again, it's really a case-by-case basis.
If someone's ex is self-employed in a cash based business, how do you determine their true income and what that business is actually worth?
Leslie: This actually comes up all the time. I realize people think the court never sees a case like this that deals with cash, but it's actually really quite common. The first thing that the attorneys would do is review the expenses on the case information statement and look to see how they are paid. Then, you would have a financial professional come in, look at the receipts of the business, speak with both spouses, discuss how expenses were made, and discuss what their standard of living is. That includes the owner spouse as well as the non-owner spouse, and it could even include the bookkeeper of the business.
What the business evaluator would look at would be to do what they call a “cash flow analysis,” as well as determining what a flow of income is. It's very easy to do once the business valuators have all the information with regards to the expenses of the business as well as the expenses of the family that this business was supporting.
Under what circumstances does someone need to hire a business valuator?
Leslie: You wouldn’t want to do it unless it's necessary. However, there are different ways that you can work with a business valuator to make it more cost-effective. For example, you could hire a joint business evaluator rather than each party obtaining their own business valuator. You would not only utilize the business valuator to determine the value of the business for equitable distribution purposes, but also to look at the stream of income that the business is spinning off for the purposes of alimony and child support.
For example, the business valuator would look to see what expenses is the business paying for the business owner? Are you paying the car expenses? Are you paying personal restaurant expenses? Are you paying certain travel expenses? All of these are different add-backs that would be important for the purposes of calculating alimony as well as calculating child support.
Also, a way to save money in the business valuation process if you were to use a joint business valuator is to also utilize the professionals that work within the actual business. The accountant for the business should be talking directly to the business valuator to get them whatever documents they use in their tax preparation and the bookkeeper to provide the spreadsheets and the monthly reconciliations. The more the parties co-operate, the better it is in order to minimize the costs of the business valuator.
To save even more money, could a business owner use the company's accountant, who is clearly very familiar with the business and values the business, instead of hiring an outside professional?
Leslie: This is one thing that I just would not recommend. I wouldn’t recommend this because it's very difficult for the accountant to determine what the evaluation is. A forensic business evaluator has gone through special training in order to value business. It's much different than being a CPA or certified public accountant who prepares taxes. Albeit it’s very complex taxes at times, depending on the business, it's a different standard that is utilized.
The other issue too is that the company's accountant may not be as independent as a joint independent business valuator would be, even when you're talking about the two spouses hiring their own experts. Obviously, there is some bias in there, but generally you will find when you do have two separate business valuators, there are certain expenses and there are certain issues that they can agree upon. There may be other issues that they disagree upon but you will not have that same objectiveness that you will with the company's accountant.
Is there any point in hiring a financial professional if the wage earning or business-owner spouse is not being co-operative about producing records?
Leslie: You definitely should hire the financial professional to value the business. If the business owner is not being co-operative about producing records – again, this is something that the courts see very frequently – the non-business owning spouse could file an application with the court and essentially take the control away from the spouse. Business owners are used to having control over their own business, control over their own lives. A lot of times, them not providing the requisite information is them seeking to have control over the process.
What will happen is a court will essentially take away their control of the process and put the control back into the non-business owning spouse. There's a couple of different ways they can do it: They can establish a discovery master who controls the flow of the information from the businesses. You could certainly serve subpoenas on financial institutions to obtain the business information. You also could even hire a receiver to collect all the profits and all the revenue from the business so that this way the business owner does not have the control that the business owner once had over the company.
All of these are extreme and expensive methods, however, these are ways that the non-business owning spouse can obtain the information that's required in order for them to value the business.
What advice would you give somebody about ensuring that they get their fair share during a divorce?
Leslie: It's very interesting about how we define what their fair share is. To some people, it needs to be 50%. To other people, it's, “I need to be able to live comfortably and I don’t want to bankrupt my other spouse because I recognize that if that happens, I'm not going to be able to receive the amount that I'm supposed to receive.”
The most important thing is that people treat each other fairly and they provide the information and documents, and that they're open and honest about what the business is actually worth, what income the business actually spins out, and at the end of the day, realize that both parties need to move on with their lives and go forward in the manner that's the most productive for each of them.