You won’t own your business forever. Many small business owners neglect to acknowledge that simple fact. Perhaps your exit will be planned to perfection and you’ll either sell to a third-party or leave via a strategic family succession plan. Or maybe life will throw you a curveball. Divorce is certainly one of those curveballs that can be devastating to a business. Even amicable separations, without the right planning, can prove fatal for business success. Here’s what you should know.
Community property can be a tough nut to crack
This section is best covered one-on-one with an attorney but it’s important to note that, in Texas, a business started by one spouse during marriage can be considered “community property” that is legally owned 50/50 by the other spouse as well. There are some exceptions—like a business funded by inheritance or when the labor-related contributions of one spouse far outweigh the other. And we’ve seen many businesses thrive when business-partner couples in a “friendly divorce” maintain joint control (with a business that has multiple locations, multiple business lines, niche markets, etc.). In any case, careful exit planning is necessary so that your baby (your business) isn’t thrown out with the bathwater (the divorce proceedings).
Not all business valuations are created equal
If you’re a business owner heading into divorce proceedings, you’ll likely need a business valuation. It’s important to note here that a common ‘fair market’ valuation may not fit the bill. Business valuations done in the case of a divorce are often determined to be complicated. For instance, “double dipping” is a common concern, which refers to counting marital assets twice, once in the property division and again in the support award. This may lead to inaccuracies in how alimony and child support, among other legal issues, are determined. It’s a very important area in which you want to be sure your financial team and legal team are on the same page. For more information on business valuations, read our previous blog post.
Forensic accounting may be useful
Due to these complications, even amicable divorces may require a forensic accountant. Of course, if one spouse is suspected of hiding assets, this type of financial investigative work may be essential for the other spouse and his or her legal team. In the end, assets can be tricky to divide no matter what. Add a business into the mix and splitting assets can be nearly impossible without an accountant who is adept at forensic auditing. For more on why forensic accounting may need to enter into a divorce proceeding, read here.
Roughly 65 percent of U.S. businesses are family owned, with about 30 percent co-owned by spouses. With about half of these co-owners ending their personal relationships in divorce, it’s shocking how few are prepared. Contact us about exit planning that covers you for every scenario you and your business may face…including the unexpected.
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