How A CDFA Can Help You Divide Your Business During A Divorce
One of my most important jobs as a Certified Divorce Financial Analyst (CDFA™) is helping my clients accurately value their assets. Some assets are relatively simple to value, like a 2018 Honda CR-V with 45,000 miles on it. Other assets, however, can be tricky. How do you value a piece of jewelry that’s been passed down in the family for generations or a one-of-a-kind work of art? One of the trickiest assets to work with is a business, especially if both spouses are involved in running it. Not only is every business unique, but clients are often emotionally attached. This is understandable, but emotions can sometimes cloud a client’s judgment. This is where a CDFA can really shine. Our job isn’t just to value a client’s business during a divorce but also to lay down some cold hard logic.
Always Get a Business Valued
For couples involved in a shared business, that business is probably one of the most important things in their life. It represents years (sometimes decades) of effort, strong relationships with employees, their place in their community, and their livelihood. No wonder dividing a business during divorce is so complicated.
When a client comes to me for help, the first thing I always recommend is to have the business valued by a professional business evaluator. This isn’t a cheap service, often costing around $5,000. Many times, a client will balk at this price tag. (A quick note, I work primarily with women, and it’s not uncommon for women to play a supportive role in a business their husband runs. In these cases, the woman is the lower-earning spouse and may feel nervous about spending so much money.)
I always tell my clients that paying $5,000 now could result in them earning far more than that amount when a business is correctly valued. After all, it is in the husband’s (or other spouse’s) best interest to lowball the value of the business so the wife gets less.
There is no easy way to value a business. That’s because even small businesses are highly complex. Many factors can affect the worth of a business, including profit margins, customer concentration, industry concentration, competitive advantages, etc.
The only way to fairly divide a business is to have it properly valued by an expert.
Determining Your Share of the Business
After accurately valuing a business, my next task is to determine my client’s share of the business. In other words, how much of the business do they own? This, too, is often a challenging puzzle. Let’s say that a husband and wife are both dentists. They open a practice together using a shared savings account for their startup costs and have the same number of clients. In this case, each spouse would be entitled to roughly half the business (all else being equal).
Reality is never this clean or simple. What happens if the husband is the dentist and the wife does the accounting for the practice? The dentist will claim he has a higher portion of the “goodwill” because the business revolves around him. If the wife stepped out of the business, he could always hire an accountant. The wife, on the other hand, couldn’t start performing dental cleanings and oral surgery if her husband left the business.
Here’s another example. A husband used his savings to build an auto shop before he was married. After marriage, his wife worked at the front desk of the business. Not only does the husband have more goodwill as the trained mechanic, but he also put a lot of his separate (i.e. not community) money into the business. See how things can get complicated very quickly?
As a CDFA, I will typically work with the client’s attorney to make an estimate on the client’s share of the business based on their unique circumstances. By knowing the value of the business, we can then come up with a clear idea of what our client’s share is worth. If we believe our client deserves 25% of a business valued at $1,000,000, our client’s share is worth $250,000.
Take the Money or Stay in the Business?
Remember earlier when I said that part of a CDFA’s job was to deliver cold, hard logic? Well, here it is. It is almost never a good idea for the spouse with the supporting role in the business to stay in the business with their ex. Many of my clients have wanted to stick with the business even after a divorce rather than take a payout. I get it. The business is the source of their income. They may have worked for the business for years or even helped their husband or spouse start it from the ground up. However, if the business revolves around the husband’s skill set or degree, then he has all the power, which he can use to undercut the supporting spouse.
I once had a client who worked with her husband in a company that performed steel fabrication. The husband was the steel fabricator. My client decided she wanted to continue working at the company rather than taking a payout. Well, it wasn’t long before her husband started a second, identical business and began moving all of his clients to the second business. My client had no ownership share in the second business and watched as profits and her income from the first business disappeared.
As hard as it may seem, it is almost always a good idea to take the buyout. Yes, you will lose your ownership share of your spouse’s business, but you will also ensure that you get what you are truly owed. In most cases, my clients can use the skills they learned from their spouse’s business to transition into a new job. In other cases, they can use their money to go back to school or enroll in a job-training program.
At the end of the day, when a business is involved, most people could use a neutral third party to help separate emotions and help them understand what is in their best financial interest. A CDFA in partnership with a great divorce attorney can do this.
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Melanie Johnson is a Certified Divorce Financial Analyst (CDFA™) and serves as the National Director of Second Saturday Divorce Workshops. Since 2006, Melanie has continuously led a Second Saturday Divorce Workshop in her home city of Austin. Melanie also works as an investment advisor for Beck Capital Management, LLC.
