Divorce and the self-employed

Divorce and small business owners

Divorce and small business owners

Being self-employed has many advantages. No boss to report to, tax deductions, shorter commutes (in most cases), etc. Yet when it comes to divorce, being your own boss can get complicated—whether your spouse is part of your business or not. And that’s why collaborative divorce is often the best method of divorce for self-employed and the small business owner.

In its simplest form, a business is like any other marital asset. It has a certain value just like a piece of real estate. When a marriage comes to an end, property either goes to one party or the other or is sold with the proceeds divided. The trick then becomes putting a dollar value on the business. Unfortunately, when it’s a business, there are a lot of other questions that need to be answered. Those can include:

  • Is one spouse more a part of the business than the other (e.g. one spouse runs and owns the business and the other is more of a silent partner)?
  • If it’s jointly owned, will both spouses continue in the business after the divorce?
  • If only one spouse continues, how much will it cost to buy the other out?

There could be a number of variables to consider, but the primary charge is to find out how much the business is worth. For that, the divorcing couples retain a business evaluator to assess the value of the business. Please note this step only applies to privately held companies. Publicly held companies are much easier to put a value on as it’s simply a matter of tallying the amount of stock the couple own.

An important note: This step of valuing the business can add significantly to the time it takes to start divorce proceedings and come to a conclusion. Though there certainly are exceptions, in my experience, divorces that involve a small business can take at least three months longer than ones that do not.

So, why choose collaborative divorce if it’s only going to add time to the process? The simple answer is: reliance on neutral evaluators and flexibility.

As the name implies, collaborative divorce centers on an agreement in principle—to end the marriage—and the rest is about negotiating how to make that happen. A collaborative divorce is negotiated by the divorcing parties with the support of professional, neutral experts. In a collaborative divorce the parties agree that instead of each hiring their own business evaluator, which often results in the battle of the “hired guns,” the parties will hire a neutral evaluator who will consider both spouses’ interest and concerns and  value the business following best practices for appraisers. This reduces both expert fees and disputes significantly.   This enables divorcing spouses to come up with a settlement they can live with and create a foundation for the relationship they will have after the divorce.

Collaborative divorce, whether it involves small business or not, does not follow a cookie-cutter approach to reaching a settlement. It invites creative resolutions and that flexibility is extremely valuable when it comes to dissolving a marriage that involves a small business under any number of scenarios. As an example:

  • One spouse owns a small business or is self-employed; the other spouse has minimal to zero involvement in the business. The business owner wants to continue the business after the divorce. Does that mean the business owner spouse has to pay his/her spouse 50 percent of the value of the business to keep sole ownership? In some cases, yes.  Or, the non business owner spouse may receive other marital assets that have the same value (e.g. maybe the other spouse keeps the family home).  Another option might be a buy out over time, or a partial buy out with the non owner spouse keeping a share of the company in the future.
  • Both spouses work in the business (e.g. a medical practice). While some couples have actually stayed in business together after a divorce, it is not always the best scenario. Still, if that makes the most sense given the parties past business practice, part of the negotiation can involve their working relationship going forward and guidelines that both agree to follow.
  • Both spouses work in the business but agree that it’s in their mutual interest not to work together. If a buyout is not an option, the couple can negotiate any number of alternative business arrangements (e.g. one spouse takes over the business while other spouse maintains a minority ownership share or they divide the business clients between them and create two new businesses).

Of course, these are just a few generic examples. In general, no two divorces are exactly alike and that’s even truer if ownership of a small business is involved. Still, if divorcing couples can agree in general about the dissolution of the marriage, collaborative divorce provides the best opportunity to come to a resolution both sides can live with.