Guest Blog: Top Tips for Business Owners Going Through a Divorce
November 21, 2019 — There are few things in life more time-consuming, frustrating, and exhausting than going through a divorce. You are at a time in your life that you have decided to end your marriage and separate from your spouse and in order to do so, you are thrown into the divorce process that requires you to trust them – trust that they will show up, trust that they will participate, that they will be amicable, that they will be honest, that they will produce the documents you need them to produce, and so on. And for business owners and high-net-worth individuals, the stakes can be even greater due to the complex financial positions of the parties involved. You’ll be asked to reveal all elements of your personal and financial life, and the documents and anecdotes you produce—or fail to produce—will be scrutinized by multiple parties.
Yet, no matter your financial position, it’s important to follow some tips and guidelines when you’ve been served—or plan on serving—divorce papers. You’ll experience fewer hiccups in your case and will have a better chance of achieving the best outcome for your specific situation.
1. Don’t hold back information from your attorney.
This should go without saying, but it’s important to be honest and forthcoming throughout the divorce process, especially with your attorney. You have attorney-client privilege, so anything you share with your attorney is confidential. However, if your attorney is unaware of material information, they cannot prepare adequately or prepare you, the client, adequately for potential outcomes. Even if you think the information is insignificant to your case, make sure you bring it to your attorney’s attention. The worst possible time for undisclosed information to surface is during court or mediation, so do not make that mistake.
For example, the first time your attorney learns that you, as a business owner, sometimes trade your work for goods or other services from your customers and you don’t always claim those goods/services on your tax returns, should not be at mediation. This is something your attorney needs to know about because it is income to you, the business owner, that can be used to calculate your gross income for support purposes or raise the value of your business (depending on the business valuation method).
2. Don’t move money around, make unnecessary large purchases, or acquire additional unnecessary debt—keep the status quo.
This should be another obvious guideline, but it’s one that is often broken. While Minnesota’s divorce Summons (one of the pleadings served on a party, in addition to the divorce petition, to commence a divorce action in Minnesota) contains a financial restraining provision prohibiting either party from disposing of any assets except for the necessities of life or for the necessary generation of income or preservation of assets (among other things), it’s critical to make sure the snapshot of your financial position after divorce papers are served remains unchanged. This will help prevent against your spouse making claims that you are manipulating your business’ books to make it look like it is worth less or you make less money or claiming that you are spending all of the money. In other words, if you plan on moving money, liquidating assets, or making a big purchase, make sure you consult with your attorney first.
For business owners, it’s important to keep the status quo as well. Don’t suddenly reduce your salary or stop taking distributions from the business. Avoid making large purchases such as new vehicles or equipment unless the purchase had been planned for some time and is a reasonable and necessary business expense. For example, if a new building was in the permitting process for the past two years and right after you separate from your spouse you receive the permits, it would be okay for construction to finally begin—you are allowed to continue operating your business and should continue to operate your business prudently.
And finally, if you are transferring money into separate bank accounts and attempting to conceal that activity, or transferring ownership of assets to other family members at a fraction of fair market value, this could be ruled as the dissipation of assets and result in you being awarded less assets in the overall property division.
3. Try and avoid emotional decision-making.
This can be a difficult guideline to follow, but an important one to keep in mind when you’re making critical decisions. For example, many people going through a divorce have a very emotional attachment to their home. But during a divorce proceeding, it’s important to allow sound judgement to be part of the decision-making process to either fight for the house or let it go. In many instances, people tend to overlook the costs associated with owning a house—and realize later they gave up other valuable assets for something that costs them money or that they can no longer afford.
Keeping your cool and avoiding arguments over petty things can also make the process go a lot more smoothly and efficiently. While you might be tempted to fight every battle that you encounter through the process to spite your spouse, agreeing to compromises could save time and money.
4. Get a proper valuation of assets.
It’s critical to involve the right experts—especially when a business is part of the mix. This is not where you want to make assumptions or cut corners. The value of a business and the salary paid to the owner can be complicated to accurately demonstrate. Sometimes this requires a more in-depth look and your attorney may suggest bringing on a business valuation expert. Nevertheless, at the beginning of the divorce process, many owners don’t want to pay for a calculation or valuation report and instead prefer a more high-level analysis. Yet this strategy can backfire.
For example, in a past case, the parties didn’t want to spend money on a full business valuation. They were certain that everything would be straightforward regarding the business’ value. However, once the high-level analysis was delivered, many things were not addressed and this ultimately made it more difficult to get an agreement on the value of the business. By agreeing earlier to a calculation or full valuation report, the parties could have avoided the additional costs of disputes that arose related to the high-level analysis. This leads into the next tip:
5. If your attorney recommends hiring additional experts, do it.
Skimping on expenses early in the divorce process can cost you down the road, especially when it pertains to expert analysis and research. If your attorney recommends bringing on a valuation expert, private investigator, or other advisors or experts, take their advice. Having a complete picture of a party’s financial position or having the right research conducted by an expert can mean the difference between an efficient process that concludes with a positive outcome or a process that gets sidetracked with incomplete or erroneous information.
6. Don’t try to hide information or avoid disclosing financial information even if it’s incomplete.
If you’re a business owner, your attorney, as well as opposing counsel, will want business documents such as tax returns, financial statements, bank and credit card statements, accounts receivable reports, fixed asset listings, and more. However, don’t become overwhelmed if an attorney or business valuation expert requests information that doesn’t exist. For example, if an attorney wants to see your QuickBooks, but you don’t use QuickBooks, providing them with what you do use is likely sufficient. Or, an expert might ask for future projections or budgets, but there may not be any. State the truth and tell them these don’t exist for your business. Moreover, don’t try to hide business documents that do If documents exist and they are requested, you have a fiduciary duty to your spouse to disclose the documents.
Also, don’t try to conceal personal expenses run through the business. Many business owners run personal expenses through the business, but trying to withhold this information may ruin your credibility. Besides, even if a business pays for items such as a cell phone, gym membership, or vehicle maintenance, the impact on the value of your business from doing so may be negligible—but it could have an outsized impact on your credibility.
7. Do your due diligence before starting the divorce.
Taking time to collect information and evidence before serving divorce papers can save you headaches down the road. Take pictures of assets, gather account information such as usernames and passwords, statements, and write down any other critical information such as account numbers. This may be particularly important if you believe your spouse is spending a lot of money or if you are not the spouse that typically handled the family financials. For example, in a case where I represented the spouse that isn’t in charge of the family financials, once the divorce process started, the spouse took all of the financial documents, including some that would prove my client’s non-marital claims. Had my client made copies of the documents before serving divorce papers, we may have saved time and money on trying to get this information back from the spouse.
8. Produce documentation in a timely manner.
Whether documents and information are requested by your attorney or others, the faster you can produce them, the faster they can be digested and taken into consideration. This means the divorce process can move at a faster pace and you can avoid a dragged out process that ultimately costs you more money.
The divorce process can be completed, and very often is, after only an informal exchange of discovery. If a party fails to make disclosures at the informal level, formal discovery can be served. This is often more costly. In a recent case, the opposing party’s lack of discovery responses at the informal and formal level resulted in me having to bring a motion to compel discovery. The motion was granted and the opposing party was ordered to produce responses and pay my client’s attorney’s fees for having to bring the motion. Even though my client received an award of attorney’s fees it was still frustrating for the client because resolution of the case was delayed in order to deal with the discovery issues.
While nothing can make the divorce process as easy as applying for a marriage license, following these guidelines can help streamline the divorce process and make it a little less stressful for all parties involved. And in many instances, you’ll be able to avoid unnecessary costs and achieve the best possible outcome.
If you have questions or would like to speak with the author, you can reach out to Lindsey E. O'Connell by clicking here.
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