Don’t Lose Your Business Along with Your Marriage!
You are a successful business owner who seemingly has it all – an adoring spouse and children, a thriving career with rapidly accumulating income and assets, and an ownership interest in your enterprise of choice. But, fast forward five, ten, twenty years — you find yourself contemplating or defending against a divorce. How will a divorce impact your business?
A spouse’s claim to your business
Maryland’s Marital Property Act says that, with some exceptions, all property acquired during a marriage is marital property. This means your spouse likely will have a claim to a portion of your interest in the business. The scope of your spouse’s interest, however, will depend on a variety of factors, including any premarital or other non-marital claim you may have to your business interest, any restrictions imposed on your ownership interest by the organizational documents governing the business, and the value ultimately attached to the business or your interest therein.
If a person develops or acquires a business interest prior to marriage, he or she may have a defense against a spouse’s claim. The increase in the value of the business owner’s interest during the marriage, however, may be subject to a spouse’s claims if it is due to the business owner’s efforts.
How can you protect your interests?
1. Get the books in order. During the divorce proceedings, your personal and business financial business financial statements will be scrutinized. A review with an attorney can help you understand what business records are available, and how the records might be interpreted. Consultation with other professionals, including perhaps a bookkeeper, tax or business attorney, or a CPA, may help you implement corrections or strategies that will leave you in a better circumstance in the event of a future separation or divorce. If you are part of a larger company and you lack access to these records, you may want to discover which records are and are not accessible. A divorce case also may require disclosure of confidential company documents, in which case a confidentiality or non-disclosure agreement may offer a compromise and a solution.
2. Get a sense of what is at stake. At some point, you and your spouse will arrive at a hard dollar figure that represents your spouse’s claim to your interest in the business, whether through an agreement or a court ruling. The sooner you have a realistic sense of that value, the better. There are a number of factors and variables that inform a business valuation, including the nature and size of the business, the knowledge and experience of the business owner, and the existence of relevant data (including the sale of comparable businesses). The valuation method and approach used to value a business can also have a significant impact on the ultimate valuation. Typically, your family law attorney will involve a business valuation professional to offer a preliminary assessment, and if needed a more formal business valuation.
3. Get help. At some point in the process, you will benefit from a consultation with a knowledgeable family law attorney. The exposure of your business interest to a claim by your spouse may be much larger or smaller than you suspect, so, it is best to gain an accurate picture of the possibilities in the early stages of a divorce negotiation or litigation. Additionally, the specifics of an operating agreement, employment agreement, or partnership document may unwittingly impact the treatment of a business interest in a divorce case in connection with a property or support award. For example, limitations on a partner’s ability to access deferred compensation or to receive bonuses might place those assets out of the immediate reach of your spouse in the context of a divorce litigation.
As is so often the case, knowledge is power and timing is everything. The sooner you empower yourself with the knowledge and tools to understand your business interest in the context of separation and divorce, the better equipped you will be to appropriately protect your business and your assets.