Las Vegas Divorce Guide for Business Owners
Getting a divorce is a difficult situation for both spouses. It’s more so if the divorce involves a small business. Business owners going through divorce inherently have a complex divorce matter. Therefore, we’ve created this Las Vegas Divorce Guide for Business Owners. Your business may be the largest marital asset. One or both spouses likely worked long and hard to build it. Now it’s time for a new phase and the challenges that go with it. This guide is not a substitute for, nor is it meant to be, direct legal advice. Rather our attorneys offer the guide as an overview of the important issues that any business owner needs to consider during divorce proceedings.
In this article we discuss:
- Business Ownership
- Prenuptial and Postnuptial Agreements
- Buy/Sell Agreements
- Outside Investors
- Commingling Business and Community Funds
- Establishing the Business Value
- Business Valuators
- Business Goodwill
- Professional Practice Businesses
- High Growth Businesses
- Who Gets the Business
- Spousal Buyouts
- Maintaining Profits During Divorce
- Your Role in Divorce Proceedings
Often times both spouses have, or claim to have, some form of business ownership. In divorce cases, there are several factors that can affect business ownership. These include prenuptial agreements, postnuptial agreements, outside investors, buy/sell agreements, and commingling of community and business funds, to name a few.
One or both spouses may own the business in its entirety. It’s also possible that outside investors have an ownership stake. Nevada community property laws are a significant part of marital business ownership. These statutes are complicated and there are a lot of “gray areas.” So only divorce attorneys with considerable experience in the finer points of financially sophisticated divorce cases should be representing you. Buyer beware. An inexpensive divorce attorney may seem like a business bargain at first. That is until you realize that you’re at a serious disadvantage and have to change attorneys in the middle of your case.
Prenuptial and Postnuptial Agreements
A prenuptial or postnuptial agreement can affect business ownership rights. These agreements must be valid in order to be enforceable. Again, the validity and therefore enforceability of these agreements is complicated. Just because the agreement was signed doesn’t mean it was drafted and/or executed properly. These agreements are “thrown-out” of divorce cases all the time. Most importantly, if an agreement is ruled unenforceable by the family courts, Nevada community property statutes prevail.
A Buy/Sell agreement is similar in nature to other marital agreements, however Buy/Sell agreements typically only govern the business specifically. A Buy/Sell agreement is often used when there are partners and/or other investors in the business. These agreements should always define the terms and conditions if the spouses divorce. Once again, any agreement can be contested in court. If the Buy/Sell agreement is deemed to be unenforceable, the terms of the agreement can be disqualified and Nevada community property statutes apply.
Funds from outside investors also affect the business ownership percentages of the divorcing spouses. These investors are often family members of one divorcing spouse, or friends of one or both spouses. This situation adds an additional financial, and sometimes emotional, dynamic to the divorce matter. Divorcing spouses make outside investors wary because the outcome is unknown. Investors dislike uncertainty.
Commingling Business and Community Funds
Barring an enforceable marital agreement, funds earned prior to marriage can be viewed differently than funds earned after the date of marriage. Often the funds used to start or build the business were a combination of both. Determining the origination of funds is also a complicated process. Our attorneys are familiar with these situations. They often employ a forensic accountant to determine the premarital and post marital sources of business funding.
Establishing the Business’ Value
Most business owners reading this guide own a private company. So the stock of the business isn’t publicly traded and therefore the business’ value needs to be established. In these cases, hiring a business valuator to produce a business valuation report is necessary. The report will state, among other things, an opinion of business’ value according to several methods. These can include: cash, book, investment, fair market, and future earnings values. Additionally, the goodwill value of a professional practice can be a complex business value issue.
The professionals that investigate the business and present their value findings in a report are called business valuators. It’s important that your attorney is well versed in both the business valuation process as well as the individual business valuator. There are various levels and some valuators are more suited to certain industries and/or business models than others.
Business valuation reports come in numerous formats. Each report is a custom project that details the value of a unique business entity in several ways. In addition to opinions of value, the report typically includes general geographic / demographic data about the business’ locale. It also includes specific information about industry health and trends, and numerous financial and other details regarding the business.
The business valuation process is not an exact science. This is particularly true when valuing the goodwill of a business. Goodwill, in a very general sense, is the value the business carries as an on-going concern. In addition to goodwill, knowledgeable divorce attorneys are aware that business valuations are also complex when dealing with intangible assets. Examples of intangible assets are: patents, copyrights, trademarks, brand recognition, customer lists, special licenses, and trade secrets.
Professional Practice Businesses
The value attached to a professional practice business also comes with its own set of complexities. Typically a business that requires a special license, in addition to the standard business license, is considered a professional practice. These include medical offices, law firms, architectural companies, CPA firms, real estate brokerages, etc. Absent real estate holdings or owned equipment, the value of a professional practice is often heavily dependent on the intangible asset of goodwill.
High Growth Businesses
Future earnings are typically a significant factor when determining the value of a high growth business. Businesses that are experiencing rapid income growth are difficult to value comparatively. If you and/or your spouse have a business that is experiencing a substantial growth in income, the previous and current earnings may be irrelevant to future earnings. Valuing a business that is experiencing a significant income upswing requires careful examination of the internal and external factors causing the growth.
Who Gets the Business
Divorcing spouses must decide whether to sell the business to a third-party or to have one spouse buy out the other. If one spouse wants to keep the business and the other does not, or if only one spouse holds a special license needed to own and operate the business, this decision is easy. The only aspect left is establishing a value and the terms of the spousal buyout.
But what happens when both spouses would like to keep the business. This can cause an impasse in the divorce settlement negotiations. One way to resolve this is to hold an auction for the buyout amount between both spouses. At some point one spouse will be willing to pay more than the other for the business.
There are no set rules when it comes to structuring a divorce settlement including the buyout of a business. It’s whatever both spouses agree to. One of the most common approaches is to work out a trade-off of one asset for another. For example, let’s say that the business has an agreed upon value of $900K and you and your spouse are equal partners. You want to keep the business and your spouse agrees to a buyout amount of $450K. Here’s the problem – you don’t have the $450K in cash.
But you do have 50% of the equity in the house and your share is worth $400K. Trading off your share of equity in the house lowers your cash requirements down to $50K. You can continue these trade-offs with other marital assets as long as your spouse agrees to the terms. If you still have a liability remaining after these asset trades, a term note with a nominal interest rate often solves this problem.
A note of caution: You should make sure that the payment terms will not negatively impact the business’s cash flow. The same goes for your desired standard of living after your divorce concludes. Making smaller payments over a longer time period is always a better choice.
Maintaining Profits During Divorce
Many business owners facing divorce have valid concerns that the business may suffer during the divorce proceedings. Even the most agreeable divorce cases can take the focus off of growing and/or running the business. If the divorce is less than amicable, as many are, the business operations can take a serious hit until the divorce matter concludes.
So what do smart business owners do in these situations? They remain smart. They throttle down their emotions in order to minimize the impact on the business. It’s usually not realistic to think that there will be a completely smooth transition. But making a concerted effort to keep your cool will pay big dividends. Smart business owners also seek the advice of experienced legal counsel. Your rights and business are best protected by hiring a divorce attorney who has handled many similar divorce cases before.
Your Role as a Business Owner in Divorce Proceedings
Business owners in divorce proceedings should prepare themselves for a totally different role than the one they occupy when running their business. This cannot be understated. After years of running your own business you may be accustomed to people doing as you tell them. In your divorce case…not so much. All the inherent power of authority and control that you enjoy as a business owner have no bearing in divorce matters. The laws of the State of Nevada and the family courts are the “business owners” in divorce proceedings. What they say goes. Family court judges take a dim view of anyone who thinks and acts otherwise. Experienced attorneys are skilled at handling these situations. They understand that preparing you for the divorce process and providing guidance throughout your case is critical.
We hope you’ve found this information from our Las Vegas divorce attorneys valuable. But there’s only so much that we can convey in this article. So we offer courtesy phone consultations at no charge. Please call our office at 702-222-4021 to learn more about how we can help you and your business.
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