Why Collaborative Divorce is Ideally Suited to Families with Businesses

Nearly every divorce involves challenging discussions about division of assets and liabilities, as well as determination of income for support purposes. When one or both clients own a business, those discussions can become even more complex. Issues include determination of the marital value of the business and the income producing capacity of the business. These items are critical inputs in the overall financial picture in a divorce, impacting equitable distribution, alimony, and child support. In a collaborative divorce process, the professional team members work together to assist the clients in understanding their business, what portion of the business is marital, and what options exist for splitting the business assets and income.

Valuing a business is both an art and a science, involving multiple valuation inputs and the exercise of professional judgment. In divorce proceedings, business owners may associate the business income and value with their personal value or may have an emotional attachment to the business. In a traditional litigated setting, both parties hire their own valuation experts to conduct separate valuations. These valuations may differ significantly in conclusions in part due to differing information received from the clients that hired them and differences in opinion regarding the personal goodwill inherent in the business. Litigated divorces involving businesses often result in tens of thousands of financial expert fees for each client, on top of legal fees, and protracted timelines that leave families in limbo for years.

In collaborative divorces, the clients can agree to obtain a neutral business valuation either by a qualified financial neutral, or by an allied professional (third-party outside the collaborative team) that specializes in business valuations. Critical to this endeavor is the clients’ understanding that the results may not be what they expect, but they will be the results that are fact-based and neutral. Further, everyone on the team will have the opportunity to review every aspect of the valuation and ask questions efficiently.

There are myriad benefits to collaborative divorce in cases where businesses are involved:

1. Preservation of business continuity – avoiding expensive, protracted litigation minimizes disruption to operations allowing the business to continue to serve as a source of income for the family. It is often the case that a family business is the only source of income for the clients. Therefore, minimizing disruption and impact to the business is critical.
2. Cost effective – hiring one expert as a joint neutral is half the cost of hiring two separate experts. This preserves family resources at a time when there may be financial concerns and avoids the huge expense of two valuation experts analyzing the business, attending mediation, sitting for depositions, and preparing for trial. Indeed, in the collaborative process, no trial preparation is necessary, saving both time and money.
3. Confidentiality – in a collaborative divorce, the financial arrangements that the clients agree to are confidential. That includes business valuation issues, trade secrets, and the business’ financial status. That is not the case if the value of the business and income available from the business are being debated in court before a judge. Those arguments, documents, and materials are then part of the public record. For businesses with trade secrets or operating practices that separate them from their competitors, valuation within the collaborative divorce construct offers a secure outcome.
4. Creative solutions – it is possible in a collaborative case that the clients want to remain partners in the business, or that one person will run the business but there is shared risk on the income, which can influence both alimony and child support. Maybe the business is worth a significant amount on paper but has limited cash available to facilitate a buyout. Maybe it is best for the clients not to co-own a business, but for there to be some kind of income split based on firm profitability for a number of years. Maybe a multi-year buy-out is necessary, and alimony is needed on a declining basis until the client is fully bought-out and can then invest those assets to support their own lifestyle needs. The options are endless. The collaborative process allows exploration of alternative arrangements for business ownership or asset distribution that are simply not available in the courtroom.

These benefits allow the divorcing family and the team to come up with equitable solutions to compensate the spouse that will not retain a stake in the business without forcing the business into a negative financial position that will hurt both parties long term.

Collaborative divorce offers a constructive alternative for families facing dissolution of marriage that own a business. Unlike litigation, the collaborative process gives clients complete control of their outcome within a supportive environment. The team approach allows both parties to ask open questions, voice their concerns, and develop an understanding of the “why” behind their resolution. By engaging neutral financial specialists and fostering team cooperation, families can navigate the intricacies of business valuation in a transparent, equitable fashion, ultimately increasing the chances of an amicable and sustainable resolution.