What Can Happen to My Small Business in Divorce? Plan For the Expected
According to State of Ohio vital statistics, the divorce rate for 2016 (the most recent reported year) was 50.9%. Despite this fact, many small business owners are unprepared for divorce, causing unnecessary, stress, aggravation, and costs. We at Gruber, Thomas & Co. have ways to protect your small business and tips on what to do in the unfortunate event of a divorce. Whether your business is an LLC, a sole proprietorship, a general partnership, an S corporation, or anything else, the divorce attorneys at Gruber, Thomas & Co. have successfully helped spouses and partners divide their business assets fairly and equitably under Ohio’s “equitable distribution,” laws.
Your first step is to plan-ahead. Consider which professionals you need to transition your business as you go through your divorce. Hire a lawyer! We humbly suggest this firm. Review your business founding documents and determine how ownership is divided. You also will likely need to hire a business valuation expert. This can be as important as the lawyer you hire. This is because the value of your business is not a static number.
There are three ways to determine the value of a business interest:
- Asset approach (Book Value)
In an asset-based approach, the primary emphasis is on the fair market value of the assets and liabilities of a business, including intangible assets such as goodwill. Often the Net Asset Value Method is used, where assets and liabilities are adjusted to appraised values to determine a company’s equity.
- Market approach
Under the market-based approach, comparative information generally uses market studies of publicly-traded companies and sales of closely-held businesses that operate in the same industry. This approach requires pricing information paid in transactions of controlling interests in companies or prices paid for the minority stock of a business in the same or similar lines of business. Such information is often difficult to find, however.
- Income approach
The income approach considers income generated by an entity’s assets over a period of time. This approach relies on the fundamental valuation principle that the value of a business is equal to the present worth of future benefits of ownership.
Two of the most common methods under this approach are:
- Capitalization of Earnings/Cash Flow: a company’s current operations are divided by a capitalization rate (the value of the company’s real estate holdings divided by the net operating income) to estimate value.
- Discounted Earnings/Cash Flow: a company’s future earnings/cash flow is discounted to present value.
One cautionary note: do not use a valuation to try and defraud your partner or spouse! If a court becomes aware of a fraud or an attempt to defraud the victimized partner can recover attorneys fees and a larger stake in the business than they might otherwise have received. The best practice is to insist on an accurate appraisal and bargain in good faith.
When you have determined the value of your business, your second step is to ask some important questions to yourself. You must ask, “Do I want to still run this company?” Where you own an run it with your spouse you will wonder; “do I still want to be this person’s business partner?” Do you want to buy out your spouse or be bought out? Will I be best served by litigating or mediating my case? Giving thought to the questions before you begin your divorce and voicing them to your attorney here at Gruber, Thomas and Co. will provide you a road map for navigating the process and most importantly being able to run your business with a level head and peace of mind. Our Attorneys have decades of experience and expertise in shepherding couples through this stressful time.
Divorce can be frightening, stressful, and risky. When your business, hard work and reputation are on the line, you want to protect that investment. Our combined experience in advising businesses and counseling those going through divorce and dissolution makes us uniquely qualified to help you either move forward as business partners or disentangle the interests in your business. Please contact us so we can help protect your assets, reduce your stress and transition you to the next stage of your life and career.