How Business Owners Can Minimize The Cost Of Divorce
Resolving the issues involved in any divorce can be costly. When a divorcing couple owns a business and didn’t enter a prenuptial agreement in regards to it, the cost of divorce can increase exponentially – unless, that is, the business owners know that there are a number of different money and time saving decisions they can make.
A business is a marital asset, just like a house, retirement account, car, and any other type of property acquired during a marriage (except for any gifts or inheritance received by one spouse alone). It is for this reason that, in community property states such as Arizona, despite the amount of time and energy each spouse devoted to the business, with perhaps one having worked in the business much more than the other, unless one spouse owned it before marriage each of them is entitled to half of its value at the time of divorce.
The question, therefore, is how to establish a value for the business at the time of divorce. In the legal arena, divorce lawyers rely on “experts,”, typically Certified Public Accountants, to opine as to the “going concern” value of a business. The process involved in calculating this going concern value is very technical but in broad terms involves ascertaining the business’s net income and then applying certain data (“market transaction multiples”) derived from relatively recent and comparable industry transactions. Furthermore, this process may make sense when a large business is involved, one that can justify the $15,000 or more that such experts typically charge for their services as well as the additional and usually substantial legal fees that will be incurred when each side’s lawyer tries to convince a judge that their expert’s opinion of value is the right one. However, this costly process does not seem to be a sensible option for small or medium size businesses; indeed, even in the case of large profitable businesses, the costs involved are not necessary or desirable for many of such business owners.
Fortunately, there are several less expensive and less time-consuming options – especially when a small or medium size business is involved. One option would be for the divorcing couple to instruct each of their attorneys to agree on the use of one neutral valuation expert. However, as good as this option sounds in theory, the reality is that many divorce lawyers resist it, not wanting to give up the chance of “winning,” while others wind up spending so much time arguing about who will serve as the neutral expert that the divorcing business owners wind up saving very little, if any, money.
Another, and typically far more productive option, is for the business owners to employ the services of a professional divorce mediator for this and perhaps any other contentious issues, limiting the role of their respective divorce attorneys to that of consultants rather than combatants. After all, it is well established that divorce mediation is highly effective, relatively quick, and inexpensive, largely because professional mediators are adept at helping divorcing couples communicate and negotiate effectively, consider various options and alternatives for resolving issues, and learn about the legal, financial, and other information they need to make informed decisions about every aspect of their situation. In the case of business valuations, this means that a divorcing couple can choose one expert whom they both trust, perhaps their own Certified Public Accountant, or a neutral third person such as a business broker who is knowledgeable about industry standards for buying and selling businesses similar to the one involved, or even foregoing the valuation process entirely, opting to just agree between themselves to a mutually satisfactory value.
In sum, divorcing couples in mediation can minimize the costs involved in valuing their business, while still getting professional assistance and advice on an as-needed basis. In addition, and perhaps even more importantly, they can discuss and consider a “fair” value for their business, which may or may not be the same as the “going concern” value, but will most assuredly take into account the overarching emotional, interpersonal, and familial interests which underlie all divorce related decisions.
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Out-Of-Court Solutions – Oliver Ross
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