Shareholder and partner Ronald Lieberman, Esq. covers the special consideration a business owner needs to take into account when going through a divorce in New Jersey.
Q: What are some aspects of divorce that are being affected by the COVID-19 crisis?
Divorce attorneys are now fielding questions on how to deal with custody of children when spouses have potentially been exposed to the virus, how to deal with loss of childcare when both parents are employed or working from home, how to deal with loss of income of one or both spouses from layoffs or furloughs, and loss of the value or even closures of businesses. Divorce or separation is a stressful time. When coupled with the COVID-19 pandemic, many are now being forced into isolation. People dealing with divorce and financial stress are at a greater risk of increased depression and alcohol and drug abuse. All this creates the perfect storm for struggling marriages. How a person handles the stress of the COVID-19 pandemic may very well affect the outcome of the divorce.
Q: What are some considerations for divorce that individuals should be aware of during times of economic turmoil?
The value of marital assets has become a moving target, as is the income available to support the family. In order to analyze property division, the net worth of assets must be ascertained. This is a difficult thing to do when the stock market is as volatile as it has been and when businesses are being shut down or experiencing huge disruptions in their profitability, which in turn affects the earnings of business owners and high-wealth individuals when that wealth is invested in the stock market. In a matter of weeks some financial and retirement accounts lost 10 to 15 percent of their value, and businesses have been closed or restricted for the foreseeable future. Additionally, business valuators often look at past performance as an economic indicator of future performance when determining the value of the business. However, in these uncertain times this could be a very flawed approach. Lastly, many persons have been furloughed or permanently terminated from their jobs due to government regulation and reduced demand for services/products. With the uncertainty in the economy, there may not be other employment opportunities.
Q: How can divorce affect a business owner or high earners, especially during challenging economic times?
One of the biggest impacts a divorce can have on a party’s business and personal wealth is the loss of all or a portion of the ownership of the business, which reduces their income, or the loss of income-producing assets to the other spouse to compensate for his or her equitable interest in the business. A spouse will likely have an equitable interest regardless whether the business was in existence before the marriage or the business is titled solely in one party’s name, because most business owners use their income from the business to support the family and thus they commingle the property. Volatile economic environments create uncertainty in earnings as well as the value of assets, including that of the business. This may cause your business to be overvalued, and may also cause a high earner to overcommit for the purposes of spousal and/or child support. If the business is overvalued, then the resulting property settlement may be skewed if one spouse is awarded the business and the other is awarded assets with more stable values. If a high earner’s ability to earn is interrupted, then his or her ability to satisfy support payments may be affected. So in times such as these it is important to be extremely conservative by maintaining as much liquidity as possible so that obligations can be met even when income is disrupted.
Q: What can a business owner do to minimize the effect of a divorce on the business?
Signing a prenuptial agreement. While a prenuptial agreement is not guaranteed to save your business, there’s a good chance it will. In it, you will designate any future businesses or businesses that have already started as separate property. There must be full disclosure to your fiancé. The agreement must be in writing and signed in the presence of witnesses or a notary, and you cannot coerce your soon-to-be spouse to sign. Signing has to be voluntary and should not done a few days before the wedding, otherwise a court can declare the prenuptial agreement null and void if your spouse proves that it was signed under duress.
● Having a buy/sell agreement that stipulates what happens to company ownership in the event of certain triggering events. Besides protecting your business from situations where your partner dies or when the business is sold, it also protects you in the event of divorce.
● Creating a domestic asset protection trust, which transfers the shares of a business into a trust that would not be subject to division in a divorce.
● Partnership, shareholder and/or operating agreements should include various provisions that would protect the interests of the other owners if one of the owners gets divorced. These include a requirement that unmarried shareholders provide the company with a prenup agreement prior to marriage, along with a waiver by the owner’s spouse-to-be of his or her future interest in the business. Also a prohibition against the transfer of shares without the approval of the other partners or shareholders.
Q: What are some of the most important things a business owner should consider when getting a divorce?
Business owners often do not plan for these types of eventualities. The personal aspect of their marriage and how a divorce might impact the business is just not something most people want to consider. The problem is that without some level of anticipation, the consequences for a business owner are great. People who own a business should consult with a matrimonial lawyer far before there is ever trouble in the marriage to discuss what steps they should consider should the unthinkable happen. I advise several strategies for clients when divorce is threatened or already underway and your business and your personal wealth are at stake:
● Advance planning. This is one of the most important considerations for a business owner. Getting good legal counsel quickly is one of the best ways to minimize the impact of divorce. Many times the process of divorce will force the business owner to reexamine how their life and the business are structured, to best use the divorce itself to redefine the business model.
● Remove your spouse. If your spouse is actively involved in your business, ease him or her out as soon as possible.
● Keep your business healthy. Maintaining and managing the business during the divorce process is also critical. Business owners need to do their best to try to keep the business healthy. Going through a divorce is a huge distraction for a business owner. If both spouses can explicitly acknowledge their mutual interest in keeping the business healthy and use a divorce process that allows for the orderly, planned use of time and resources, then the business owners present a confident, controlled picture of the business when they interact with third parties and employees.
Q: Will a spouse automatically get half of a business in a divorce?
The Court will have to first determine whether the wealth or business is even a marital asset. If not, then it is not even on the table or subject to division. If the Court determines that it is a marital asset, then the Court must determine the most equitable way to divide the asset. In New Jersey, all assets are not equal and there is no presumption that a spouse will receive half of any asset, including a business. Most of the time, a business valuation will have to be performed on the business to determine the value. Of course, since most business owners receive income from the business that they operate, the Court must closely scrutinize how the owner’s income relates to the valuation of the business itself, so that a spouse does not double-dip in terms of the consideration for income in the award of child support and/or alimony, and in terms of division of property if the value of the business is considered.
Q: How can a business owner protect his or her business interests before getting married? What are some best practices for prenuptial agreements for business owners?
A prenuptial agreement is the best way. When working with an attorney to prepare a prenuptial agreement, the business owner should be very specific but should also leave room for growth and development. It is important to specifically identify any existing business, but also include language that protects business that are derived from those currently existing. Businesses often change names, partners or leadership throughout the course of their existence, and these changes must be taken into consideration when including a business in a prenuptial agreement. Start working with a lawyer to draft the prenuptial agreement early so there is not a rush and all possibilities can be considered.
Q: What are some questions business owners should ask their divorce attorney, but often don’t?
The question is “How should I manage my business during this process?” My answer would always be “Just like you did before.” I have seen people attempt to reduce business in order to show less income, or attempt to delay a large transaction to reduce the value of the business. I have seen owners attempt to sell a portion of the business to a family member or change control of the business before they speak with an attorney. During a divorce, you should operate your business in the best interest of the business. Period. Any unusual actions or dramatic changes will be heavily scrutinized. Business documents such as bank statements, formation documents, meeting minutes and the like are discoverable by both parties. So delaying a large transaction, voluntarily reducing income, or changing ownership of the business will all come to light throughout the process. Business owners should always consult their attorney before doing anything outside of the traditional operations of their business.
Q: How can I ensure my divorce doesn’t impact the performance/continuing operations of my business?
Most people rarely fully prepare for a possible divorce and probably won’t have given a moment’s thought to what impact a divorce could have on their business until their spouse serves then with the papers. What do you do then?
● Get an outside valuation of your business. You may feel confident that you can guestimate the value, but it is necessary to get multiple outside and unbiased appraisers. The economic crisis may very well take a bite out of your company’s value, even if it is sound and profitable. That’s probably in your favor during a divorce.
● Hire specialists. Work with a family law attorney and an accountant who has a lot of experience with business owners, and avoid generalists.
● Don’t play games. Don’t hide assets or pad losses in the year leading up to your divorce. Avoid making major investments or incurring bigger one-time expenses during the divorce. Operate in good faith and provide full disclosure, which will expedite a settlement and avoid any possible sanctions and additional fees.
● Don’t lose focus on your business. A divorce can be emotionally draining, and it’s important to give yourself a break and some time away. However don’t lose the motivation that brought you success in the first place. If your soon-to-be ex-spouse is still financially tied to the future income stream of your business, it’s easy to be bitter but that doesn’t solve anything. Make the best of the situation.
● Be ready for the unexpected. You expect the unexpected in your business. You should do the same during the divorce process.
Q: What are the differences for business owners in a case where the spouse is involved in the business?
It is often very difficult to maintain a business relationship with your spouse after a divorce, which is why most attorneys recommend against it. It’s often a recipe for disaster. But if you and your spouse think you can work together in a reasonable way, you can choose to do so. It might be a good idea to put some stop-gap measures in place, such as an agreement to mediate or allow a third party to make decisions if you and your spouse reach a point where you cannot agree. While each business will have its own set of problems and complications, there are basically three methods of dealing with a business during divorce:
● Co-ownership, where both spouses continue to own the business after the divorce. If spouses remain amicable, it may be possible to work together after a break-up. But this is not for the weak of heart. It will require a solid working relationship and high level of trust.
● Sell the business and divide the profits. The pros of this option are that both spouses may profit from a sale of the business and can use the proceeds to invest in their own business ventures. The downside is that this could take some time, since it may be months before a buyer is found.
● Buy-out the other spouse’s interest. This may be the best option assuming there are sufficient assets to complete the transaction.