Dividing a family business can present many issues, so here are a few examples common issues and the outcomes.
The first issue is making sure to get a professional valuation of the business. Let’s pretend that Joe and Patty had been married for 35 years, Patty being the “stay at home mom”, while Joe owned and operated a successful manufacturing business. Joe claimed his business was worth $6 million, while the family net worth totaled $10 million, leaving an additional $4 million in cash and retirement funds. Joe offered to split the marital assets in half ($5 million to Patty) and pay enough maintenance to allow Patty to continue her previous lifestyle (including not working outside of the home).
It was suggested that Joe have his business appraised, but he didn’t want to, sighting a desire to not upset his employees. He also mentioned he had several contracts near finalization and didn’t want to scare off customers. Having never encountered this situation before, Patty was willing to accept Joe’s settlement offer. Although Patty’s attorney and divorce financial planner encouraged her to have Joe’s business appraised, she was reluctant. She knew she was probably leaving some money on the table, but they had two teenage daughters and they were trying to keep things amicable. Joe actually said he would make trouble if Patty didn’t accept his offer.
Patty’s advisors finally negotiated a deal where Joe would pay Patty an additional $500,000 cash up front, along with the $5 million of marital assets. She was also set to receive $10,000 per month maintenance. Once the deal was finalized, Joe came to Patty’s advisors and thanked them for help settling their divorce. That seemed very strange since they had just “dinged” him for an additional $500,000.
Well sure enough, within the year, John sold his business for $30 million dollars!
And because Patty wanted to keep things civil for the children, she would not file any grievance against Joe.
Another common issue is how to divide the business when both husband and wife have worked side by side in the business. In this example, Mary and her husband Ty owned a fast food restaurant in a ski area (plus they owned the building). Towards the end of settlement negotiations, they finally decided that Ty would keep the business and Mary would keep ownership of the building.
Mary became Ty’s landlord and, you guessed it, she raised the rent, she didn’t make repairs, and she did not make any improvements they had been talking about for years. It became an impossible situation.
The solution? They went back to court. Ty bought Mary out and Mary moved out of state. This was probably not the most favorable decision, but it is what worked for this couple. In most circumstances, remaining joint owners of a business (or in this case, businesses closely tied) presents a very difficult set of challenges for the former couple.
A third problem is when most of the value of the marital assets is in the business and there seems to be no way to buy out the other spouse. If the husband owns a business that is worth $4 million and he owes his ex-wife $2 million to equalize the property settlement, how is he going to pay that $2 million? The obvious answer may be to structure a property settlement note – especially if he has high earnings and can afford a monthly note payment to her.
The problem comes in figuring out how to collateralize the note. One solution is you can collateralize a property settlement note with a QDRO attached to his retirement plan. Whether it is a 401k or a pension, a QDRO can be put in place so in the event of non-payment of the note, payments from his retirement plan will activate. That’s a creative way to secure a payment.