Nolo's Essential Guide to Divorce - Emily Doskow [116]
Day-to-Day Operations
If you and your spouse have both been running the business on a daily basis, then the first question to ask is whether you can continue to do that during the divorce. For many people, that kind of day-to-day contact is difficult during a divorce, and the many small decisions that must be made every day create too many opportunities for friction in a situation that's already fraught with tension. One way to deal with this is to split your time at the business, alternating days or weeks. Another is to divide decision-making responsibilities into categories of tasks. A third is for one spouse to back off for a while and allow the other one to manage the business.
This last option might be the easiest from an emotional standpoint, but it raises other questions. Will the spouse staying with the business be compensated in any new or different way for taking over the tasks of the spouse who backs away? How much compensation will the spouse bowing out be entitled to? How can the spouse who's out ensure that things continue to function well?
Especially if there's been conflict about how to run the businessnot a stretch of the imagination where you've decided to divorcethere have to be some ground rules about what can and can't happen during the separation. (These rules are in addition to the most basic rule that business partners always owe each other standard "fiduciary" duties not to do anything detrimental to the business.) You probably know well what the hot-button issues are-anything from advertising, improvements, and inventory choices to staffing or accounting practices.
It's a good idea to prepare an interim written agreement that sets out those limits. Unless there's a pressing business reason to make big changes, the gist of such an agreement should be that during the separation period no big decisions or changes should be made, to the greatest extent possible.
How Much Is the Business Worth?
Before you can decide on a long-range plan for your business, you have to determine what the business is worth.
Valuing a small business is a tricky thing, and no two people will come up with exactly the same estimate. If one divorcing spouse is keeping the business and the other is selling or exchanging shares in the business for other assets, each one wants the value to come out a certain way.
In some business fields, there are certain rules of thumb or formulas to get a rough estimate of value. For example, you might take the year's profits multiplied by five, or triple the value of the inventory. These are very rough guides, and you should always consult an expert in the specific industry to learn how to refine them with specific information. A lot of other factors can go into figuring out a buyout price, including:
• what comparable businesses have sold for recently
• assets and inventory
• debts and obligations
• potential for income from the business, and
• terms of payment (a buyer who can pay cash can usually get a lower price).
At divorce, an essential part of valuation is determining whether the property is wholly marital, partially marital and partially separate, or wholly separate. (Marital and separate property are explained in Chapter 9.) Most small businesses involve at least some marital share, even if one spouse owned the business before the marriage and the other didn't work there. When one spouse puts a significant amount of energy into maintaining or enhancing the value of an asset during a marriage-and anyone who knows a small business person knows how much work it is to be the boss-then a marital interest is created. (This is called the rule of "marital effort.") The premise is that in order to give all that attention to the asset, the spouse must be getting support from the other partner and from the existence of the marriage