Lets face it: attacking the business is the single most likely thing you can do to raise tension and animosity in your divorce. But then again there is a principle of fairness and many times you must do what you need to do. The problem is cost and complexity. A proper examination of a business requires not only a business valuation, but also a Forensic CPA. It can be very costly and time consuming. In cash based businesses, a proper evaluation of business finances may be close to impossible. The process of pulling out business information, examining it, and packaging testimony for the court can be drawn out and nerve wracking. Finances can run low through this lengthy process. Many non-owner spouses must weigh possible settlement scenarios versus the uphill battle of examining a business.
Legal, but Creative Accounting – There are many legitimate techniques you can do to minimize the apparent value of the business. This strategy must be started years before the divorce. You may decide to “accelerate” expenses and “defer” income. In practical terms that could mean a several year program of upgrading your premises, or putting in place a multi-year program to enter a new area of business. The benefit from either measure will be years away. But the effect on the P & L would be to minimize income and minimize business value.
Recognize Potential Losses – Do you have a ton of aging, outdated inventory on the shelves? Most business owners are reluctant to get rid of outdated inventory because it has a theoretical value and that value makes the business look like it is worth more money. Now is the time to liquidate that inventory and write down the value.
Hire More Employees – Don’t get completely ridiculous but now is the time to bring on that extra person you wanted. If you are like most business owners, you work a long week and do without the help you need. That can put more money in your pocket but also ups the apparent value of the business. If you know divorce is in your future, dial back your work hours and hire new employees. Of course you must always consider business realities and the possibility of driving yourself under.
Chart out Hiring Versus Annual Revenue – Many of your strategies involve neutralizing the strategies of your spouse. A way to ferret out excessive hiring practices is to create a chart of the number of employees versus annual gross revenue. There should be a relationship between the two trends. If not – you can be pretty sure someone is cooking the books
Get Records from Major Vendors – A sure fire way to get an x-ray of business income is to subpoena records from major vendors. A certain amount of dough equals a given amount of pizzas – and annual sales can be predicted by looking at that number. That principle extends to most types of businesses. More supplies equals more income. Another benefit of looking at that trend: you can detect a “run-up” in inventory by a spouse attempting to inflate expenses.
Work at the Business – A strategy that only works if you implement it years before the marriage. There is no better way to get an idea of what goes on in the business. Another value this strategy provides is the ability to firmly designate the business as a marital asset.
Most businesses have hidden tax-gems embedded in the books. More often than not the owner used extremely aggressive accounting tactics to avoid taxes. Both spouses should be aware that an extended battle over a business could cause a tax-Armageddon. A devastating audit from the IRS at the wrong time can destroy the potential assets of both spouses. Whatever you do, you must try not to rock the tax-boat and expose both of you to undesirable effects. Remember, you both may become liable for tax deficiencies caused by the audit. And the obvious issue – a destroyed business is one less asset to divide.
Goodwill – The part of the business considered “goodwill” is not a marital asset and will be excluded from the divisible value. Goodwill is the part of the business value that immediately disappears should the owner be “flattened in the road.” In other words, if a part of the business is directly linked to the existence of the owner – that portion may not be considered a marital asset.
Your attorney must be prepared to scan through records and think like a business owner. This is an extremely important principle for both sides in a divorce dispute over a family business. You must also consider the cost/value of settlement versus the cost of fighting all the way to the end. The Law Firm of Ayo and Iken has attorneys experienced in dividing businesses, and defending business owners. Attorney Howard Iken can be of special help to spouses facing this situation. He is a former adjunct professor of business, has a Masters in Business Administration, and has personally bought and sold small businesses.
