Knowledge Base

Entrepreneurs Divorce How are their (Separate) Business Interests Valued and Divided

October 1, 2018

By Lynne C. Halem

Divorce can be, and often is, a complicated process. Couples undertake a detailed introspection of all of their possessions. Although some decisions are arrived at with relative ease, others are quite complicated, requiring appraisals, analyses, and in the best of situations, creative decision making.

Perhaps the most complex of all division questions pertains to what is often referred to as the family business.

Imagine, for the moment, the story of Adam Speaker, who is the president and sole stockholder of a consulting firm, and his wife, Debra Bridges, who is president and sole stockholder of an interior design firm. In their divorce negotiations, both parties agreed that they wanted to retain his and her own business, that each business had yielded an equivalent annual income for the owner, and, as far as Adam and Debra were concerned there was no issue to be raised or decided. Their lawyers concurred and even went a step further, advising their clients individually and jointly, in a four-way meeting, that no valuations needed to be undertaken; after all the parties agreed that each business provided reasonably equivalent incomes for their owners. No issue, Right? Wrong!

Three years after the divorce was finalized, Adam was having financial problems. The consulting industry had been badly hurt by the recession. His business was struggling to retain current clients, let alone secure new ones. Debra’s business was having no such problems; in fact, she had recently expanded, hiring new staff and entering into negotiations to open a retail store. Adam did not take the news of Debra’s success well. He suspected some underhand shenanigans, thinking that she knew all along that their business trade off was really not a balanced deal. Something must have been in the works before the divorce. And so Adam called his divorce attorney. “Too late,” said Mr. Brown, Adam’s attorney. “Property divisions are a done deal unless there was fraud. Should be pursue that avenue?” Put in those words, Adam really did not know if Debra had purposively deceived him, and had, in reality, committed a fraudulent act. He did not think he wanted to sue Debra. He did, however, call her. She seemed genuinely upset about his business reversal, offering encouraging words about his ability to turn things around. “It will get better, “ she said. “You always land on your feet.”

Did Debra know all along of opportunities for expansion of her business? Had she committed fraud? The answers to these questions did not come easily or at no cost. Adam did seek an appeal to the division of property, not an easy avenue to pursue. But before court proceedings commenced, Debra asked Adam if he would be open to mediating their dispute. Frightened by mounting legal bills and leery of his ability to score a court victory, Adam agreed.

The mediation was an eye opening process for both Adam and Debra. They came to realize that despite their willingness to agree that each party would retain his and her own business, they still should have engaged in some formalized appraisals. Neither lawyer nor client ever thought of this undertaking. Yet here they were three years later, unsure if appraisals would have revealed a difference in the fair market value of each business. Adam accepted Debra’s assurances that value never entered her mind. It seemed so intuitively logical that they would each keep what was theirs, especially since there was a marital history of similar incomes from each enterprise.

Clearly they realized that their lawyers had encouraged this nonchalant approach. Whether or not the value of each business was always disparate or whether changes in the economy or management or luck had wrecked havoc on Adam’s business, leaving Debra’s unscathed, neither knew. To the credit of Adam and Debra, they were able to look at areas where changes could be made, a far different approach to building a case for fraud, a case in which both parties would be engaged in a truly hostile legal battle. Child support was adjusted to compensate for Adam’s reduced income and for Debra’s increased income. Debra agreed to fund the children’s private schooling until Adam’s income improved. She also agreed to change their parenting schedule in order for Adam to pursue business opportunities for developing a new client base in Europe.

With the help of a skillful and knowledgeable mediator, Adam and Debra were able to move forward, rather then dwell in the past, trying to uncover the truth about an event that took place three years ago. They filed a joint modification in court to reflect changes in support and their parenting plan and, of course, Adam dropped his suit.

The story of Adam and Debra is a complex one, clouded by the actions and inactions of clients and lawyers who accepted a division of assets based on assumptions instead of facts. In the final analysis, their guesses may have proven to be valid, their perception of equality may in reality have been accurate. Neither party will ever know. Adam and Debra have agreed to live with this uncertainty, to move forward in a cooperative manner “as parents”; this was the route of choice. One can only imagine what the outcome would have been for this family, if Adam had sued Debra.

At CMDR we believe that the division of business assets requires an understanding of value. Adam’s and Debra’s situation is by no means unique. Quite often businesses do suffer losses after divorce, including bankruptcy and closure. We believe couples should proactively assess their Businesses' values at the time they divorce, specifically to avoid having to do it retroactively, (or worse, harbor suspicions of deception) during a time of financial tension in the future.  Full financial disclosure assumes both parties have access to information from the outset. Future reversals of circumstances still occur, but at least they are not tinged with ill feelings of being intentionally wronged.

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