Yours and Mine, but the Business is Ours

Home mortgages aren’t the only transactions these days in which people are making high payments based on the formerly high value of a now diminished asset. Attorney Ed Winer says consider the business owner who’s engaged in a divorce proceeding or is making settlement payments to an ex.

“What do you do if you’re under a court order to pay a sum of money” to a former spouse, Winer asks, “and the income-producing asset that you’ve received [in the divorce] suddenly has much lower revenue and much lower income for you?”

It’s a trend that Winer sees gaining momentum from his vantage as co-chair of the family law practice at Moss & Barnett in Minneapolis and one of the “Top 100 Attorneys in the U.S.,” according to the December issue of Worth. Business valuations, which are based on companies’ past performance, are out of kilter with companies’ ability to actually produce value in the current recession.

Winer has a case now where “if the client is forced to make a payment, they are taking away from the needed operating money in the business,” he says. “They had two suppliers they had to pay or [the suppliers] were going to cut them off.” In other cases, business owners are violating their bank covenants to take distributions from their companies so they can pay a former spouse who is owed part of the value of that business.

It’s too late for them to set up an “antenuptial” agreement, but that’s what Winer says business owners should consider when they’re planning to get married. A business, or at least its increase in value during a marriage, is almost always counted among the “marital assets” to be equitably divided in a divorce—unless it’s been otherwise designated in a prenup.

In addition, Winer says, the business is often the biggest asset in the marriage, too large to be offset by giving up a home, vehicles, or other items to a spouse. That’s why the value of the business itself must be divided in most cases, often with one spouse buying out the other using income from the business.

For business owners who are considering a divorce, Winer and colleague Richelle Wahi Reiff advise having the most current possible company financials to give to a business appraiser, and working with certified public accountants and other professionals to bring high credibility to those financials and to any projections of the company’s future performance.

For business owners whose divorce cases are already settled, leaving them with obligations they can’t meet, Winer says there can be relief in filing for a court order that will extend the schedule of payments to an ex, or in mediated negotiation with that ex for new terms.

If there’s an upside to be found in matters of recession and divorce, it’s that economic distress is prompting more cooperation between couples splitting up: “Both sides have to recognize that they can’t take positions that will kill the golden goose.”