Part of the America’s Entrepreneurs Special Report
Women entrepreneurs who get divorced have special financial concerns and challenges. Whether your venture is a sole proprietorship or you’re in business with your soon to be ex-spouse, it’s essential that you know what the company is worth.
It’s quite possible that your business may be your biggest asset. If your spouse wants a piece of it in a settlement, you need to be sharp-eyed about its value and its future growth, as well as any liabilities or debts the company may have. Moreover, if you’re partners, you will need to know what you’re entitled to as a payout of if your husband or wife wants you to buy you out.
In my latest book, Money Confidence: Really Smart Financial Moves for Newly Single Women, I offer ways to tackle these concerns. Here’s an adaptation from the book with my recommendations:
Determining the Value of Your Business
Because of the very nature of its ongoing operation, quickly taking stock of the value of your business is urgent. If you’re going through a divorce, you must have an accurate value of any business interests before your divorce negotiations begin. That will ensure you receive an equitable buyout, either in terms of what you may need to pay your spouse as part of a divorce settlement if it’s your solo business, what you may receive if you want out of the partnership or what you will need to pay if your ex wants out of one.
Take the time to do this. It can be messy.
Separating your personal finances from your partner’s is difficult and tension-filled. So is disentangling yourself from a joint business or keeping your company afloat if your husband or wife is going after a portion of it in a settlement agreement.
Knowing precisely what this asset is worth ahead of time can help you avoid taking a financial hit. A business doesn’t stop just because you two are splitting up. There are clients to deal with, orders to fill, bills and employees to pay and much more.
You may have made a guesstimate about what your business is worth, but now it’s time to run the real numbers. This is one rather large asset for which you should have your own independent appraisal. Even though your partner might be utterly helpful and willing to disclose all on the surface, take a second look.
You’ll need to have the company’s value appraised by an unbiased professional like a forensic accountant, who is trained to scrutinize personal and business financial records with an eye not only for what they show, but for what is missing. Most accounting firms have someone with this expertise on staff. There are also professionals who do these kinds of business appraisals for a living.
To get your business appraised, you might also be able to find someone trustworthy through your attorney or accountant. Another option is to go to the American Society of Appraisers online.
The key is to have a professional on your team who can plow through the company’s books and records to determine the value of:
- the computers and other equipment
- the building (if it is owned by the company and not a lease situation)
- any additional real estate holdings that might be involve
The appraiser will need to know how much income is generated each year and how that is likely to grow over the next several years.
There are also intangibles to take into consideration. For example, how recognizable is the firm’s name, and what does this add to its total market worth?
In a privately-held family business you and your spouse co-own, it’s not always simple to follow the money trail. There may be outstanding loans that were made on a handshake. The books may not be as neat and up-to-date as they would be for a public company.
If you are partners with your soon to be ex and haven’t been completely immersed in the financial underpinnings, this discovery phase is essential. There are dozens of wily ways your husband or wife might disguise the company’s true value to avoid paying you your fair share.
Certainly, in a down-and-dirty divorce it’s not unusual for a partner to try to find ways to mask a business’s true value. He or she might hide profits or pump up the company’s expense statements or even list false employees on the roster.
You want to be certain your ex doesn’t have loans, deferred compensation or contracts that weren’t disclosed to you.
There are a million tricks someone can pull to bury a firm’s value, so make sure you hire someone who can do some sleuthing for you as well. Nothing is as it appears on the surface — that’s a given.
Dividing the Spoils
Once you know what the business is worth, you have to figure out how you are going to proceed: whether to sell it, keep it or split it up. The complexity can be astounding, so in addition to the appraiser, you may want to hire an accountant and an attorney.
Figuring out how to divide up the business will depend in large measure on whether the business is in your name or owned jointly, as well as the state you live in. In most divorces, whoever owns the business will not actually sell it, but rather, will substitute another asset for the value owed.
In the 41 equitable-distribution states, the business is considered by the courts to be marital property, similar to your home and other investments. If you live in a community-property state such as Arizona or California, you and your ex will be awarded half of all the assets the two of you accumulated during the marriage.
If your partner started the company before you were married, it will be a little tougher to determine just how much you’re owed. The same goes if you started your firm before the marriage. If you began your own business during the marriage, he or she will have rights to it as well.
Typically, once a divorce is filed, you’ll have a period of time to file a statement of worth and list all the assets. The judge will consider a dozen or more other factors before dividing the pie. For example, the amount of time and effort you put into running and growing the business is an important consideration. The more involved you have been, the more payback you will likely receive.
Try to get your hands on as much information as you can about the company and its records. If you can get copies of tax returns for the last five years or so, that’s terrific.
You will need hard-copy proof of any money you put into expanding the firm, so go through your files for canceled checks and other documentation. Finally, if you have any joint accounts or if both your names are on loan documents, you’ll want to write to the applicable institutions and tell them to make no transactions without your approval.
Negotiating the Deal
In a company with several partners, there is usually a prior pact, known as a cross-purchase agreement, stating that if a partner leaves the firm or dies, the other partners will buy him or her out. If you want to leave the business after a divorce, the other partners might opt to buy you out or loan your partner money to do so.
Partnerships also might have agreed when the firm was formed to value the business based on something concrete, like the prior year’s profits. A judge might insist on the present-day value, but you can’t be sure of that.
What About Taxes?
If your ex pays you a straight transfer of cash within the time frame imposed by the Internal Revenue Service (it’s complicated; see the IRS site here), it should be tax-free. Since this is a tricky area, get your accountant on board.
If you have to accept a promissory note from your partner because he or she doesn’t have the resources to pay you off immediately, try to keep the time frame as tight as you can. Any transfer more than one year after the end of the marriage is open to inspection by the IRS, but if the divorce or separation agreement requires the transfer, it should be covered.
Also, make sure your ex has something of value to back up that loan. The promissory note needs to include collateral that will default to you if he or she can’t pay in the agreed-upon time frame.
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