Welcome back to the Oxendine Law podcast. Today we're talking about frankly I think one of the toughest issues in a divorce. Aside from custody and parenting time, but aside from that, one of the most toughest issues that we faced from a financial perspective in a divorce is dividing a family business. Not talking about a business that somebody brought into the marriage or started on their own or one spouse ran the business and the other spouse had nothing to do with the business. We're talking about the scenario where we have a true marital, jointly titled and jointly owned and operated business. So, we're going to walk you through today how uh those business assets are divided and how you can protect your interest in your livelihood that you've worked so hard to build up and acquire in the event of a divorce. Christine, this is a very difficult issue, especially when you have two parties that both think they are the face of the business, right? I mean, husband has a role that's very essential to the business. Wife has a role that's very essential to the business. Now they're getting divorced and we're fighting over not only what the business is worth, >> but who's going to get to keep the business. >> Sure. And if you think about it, depending on what type of business it is, are these people capable of earning any income outside of this business? If this is a unique business that you and I as husband and wife have started and have cultivated, can I if you end up keeping the business, can I go out and make money doing something similar somewhere else? So that's another component is what would either party's potential income be without this family business. We're talking like a true mom and pop, whether that be anything from owning a store type business, um realtors that are true partners, um or even like up to a multi-million dollar corporation that was owned jointly by a husband and wife. Um it is everything. It is your source of income for both parties. It is an asset of value in and of itself. So, it is a very unique circumstance when you have a truly family business. Or think about this. Was it started by some of the grandparents? Right? Is it a business where it's passed down the line, but now it's marital only? It doesn't matter if my dad started it. If he's out of the picture and just us own it now, it it's a marital business. >> Yeah. And so I think the where you have to start with this is is very basic. And the first basic question is, is somebody keeping the business? Which means somebody's getting bought out? And I'll talk about an exception in a minute that I don't love, but some clients have insist on doing and we've done it and some have worked out and some haven't. You know what I'm talking about. We'll come back to that in a second. >> What's coming? >> Um, but are we keeping the business such that one person is getting bought out or are we selling the business because two very different things there. Yeah. >> Um, frankly, I would argue selling the business as long as there's a good market for the business is probably an easier scenario. >> It is. And they're only fair way as well. It probably is the fairest way because at the end of the day that business is worth whatever somebody's willing to pay for it. And so we can easily structure an agreement where frankly both parties continue to fulfill the roles that they've been historically fulfilling in that business, whatever that is. And they both continue their same salaries and distributions. Nothing changes. And then when the business is sold, they equivide the proceeds and they share in the tax liability to the extent there's some type of capital gains tax. That's actually probably the easiest scenario, but most commonly that's not what we end up doing. >> Well, it's not what people want. You've worked on this business your whole life. And at least one of you needs to keep it going for the posterity and the sake of your children and everything else. Like when you start something from the ground up, you aren't so quick to just sell it and try again. >> That's right. And so, you know, that is a tough consideration when you have two parties that are saying, "I am the face of this business or we're equal faces of this business and you both want to keep it." Now, I'll be honest with you, most of the time, not always, but most of the time, there's a clear person that is really running the business. And those cases are easy because what the court's going to do is if if husband for example or wife doesn't matter who it is is kind of the main point of contact with the customers and that's the person that's generating the leads and that's who all the customers know and interact with and um potential clients recognize one spouse over the other or one spouse is basically running the business primarily the other spouse may be just doing some bookkeeping on the side. Well, clearly the spouse that's primarily responsible for running the business is probably going to be given the first opportunity to keep the business and then they buy the other person out. But when it gets difficult is when both parties say, "Hey, we both are intricate to this business." And if they both want the business, news flash, if they can't agree, the judge is either going to make a judgment call on who he or she thinks is the true face of the business, and the other person's going to get it bought out, or if the judge feels there's a market for the business, then it could just be sold. >> And I don't think a lot of people realize that a judge can in fact force you to sell that business. Now, if you have another partner of some sort, that's a different story. But if you are just husband and wife, joint owners of any type of business, no matter how large or small it is, no matter what the industry is, a judge can in fact make you sell that business, >> right? And so that's where it gets a little complicated. Now, I will say every case is different. Everybody has a different goal. There's some pluses to getting bought out. I mean, if you've been toiling and sweating in this business for 20 years, you may be tired of it. And what a great golden parachute opportunity for your spouse to buy you out. It's like you've put your business on the market for sale and you found a buyer. >> Yeah. >> And they're going to buy you out for your business >> and you get to sit and frankly do nothing while your spouse continues to work for the business and then pays you out. I mean, that's not a bad scenario for a lot of people. >> Um, and then the person that's keeping the business obviously has the ability to grow the business post divorce and maybe increase their income. Hey, sometimes people fool themselves and think they're going to be able to continue to run a successful business and increase the income and they really can't. So don't think that just because your spouse is going to keep the business and buy you out. That's a bad deal, right? >> It frankly may be a better deal. Sure, >> because your spouse is going to be stuck with that business and buying you out, they can never modify that buyout. Whatever they've agreed to pay you, you get to keep. They can't modify it. And they're on the hook with the business. They got to run the business. They got to deal with the clients. They got to deal with the customers. They got to produce revenue. They got to pay the bills and you just get a check. >> Yeah. And depending on what we structure and how we structure it, if there's not a non-compete, you can take your little money and go start up a whole new one if that's what you decide to do as well. >> Well, and I was going to touch on that. So, obviously, yes, you can. Now, if I'm representing the business owner and I've got a spouse that's been equally involved in the business and I decide I'm gonna keep the business and buy my spouse out, if I'm representing that client, I'm going to want to non-compete because that's what you don't want is to pay your spouse out and then they go down the street and open up a competitor. You don't want that. Now, obviously, if you're representing the client that's get bought out and the other doesn't think about that, take the money and go open up the new business. And we've certainly seen that happen. may have hasn't happened to our clients because we protect that. But we've seen attorneys not account for that and our clients have literally I know you've had cases about that too where you literally are smiling the whole negotiation because the other side is buying your client out and nobody said anything about a non-compete. >> Yep. >> And your client is so giddy because they're getting all this money for their buyout and then they're just going to go open up another business. >> Right. Or how many times have you called the other side's bluff when they're like, "Oh, we want we want the business. We want the business." And you tell your client, "Fine, give it to them." Like what is that business truly if you are not there? Think about it. If you're gone, is that going to be a successful business? So, okay, fine. Keep it. And I'll get the buyout and go over here and do my own thing. >> Yeah. Because some some parties know, I mean, as much as their spouse is screaming and yelling that, "Hey, I can run this business without you." Some of our clients know they can't. And they're usually right. And if we have enough assets, see, what we don't want to do is is depend on a monthly payout in that scenario. So, so if your spouse is going to be paying you out monthly, then make sure they know how to operate this business and run it successfully. Because if the only way you can get paid out is by monthly payments to them based on the success of business, well, they damn well be better be able to run that business. But if you've got significant assets in other pots where you can just get a larger share of the remaining assets and they get to keep the business and they're foolish enough to think they can run it without you and then they tank it, who cares? You've already been bought out. >> I mean, I've had one where it was that exact same scenario and there was significant equity in the house and my client said, "Okay, give me the house and you take the business and the house is going to be successfully run still." But that business was not. But we weren't worried about a buyout, right? Because we protected what she wanted by getting her the equity in the house. He got his whole business. And you know, it wasn't nearly as fruitful without her around. >> That's right. So, you got to watch out for those things. And folks, we're going to try and keep this episode on high level. We could probably talk about this subject for a couple of hours because it gets really complex talking about tax considerations and how valuations are performed and discounts that need to be applied to valuations. But let me just generally state if you're the person getting bought out, you got to know what number to get bought out at. And so that means if you're getting bought out, your spouse is keeping the business, we need to make sure that we know what the value of that business is. And so the way we do that is we hire an accountant. We have accountants and experts that specialize in doing business valuations and they will get all the corporate documents and financial statements and paperwork. They'll look at the market. They'll look at other similarly ssized businesses and see what those are either on the market for or what they've sold for. They'll look at your customer base, whether those clients are repeat clients or whether they're newly acquired clients. In other words, are your customers uh an ongoing book of business or once you're done with that customer, is the business done and you have to acquire a new client. All of that goes into deciding what the value of the business is. And once that is determined, you get a number business is worth X. And it's that number that we use to bouch your spouse. Now, I will give a couple tips here real quick. Don't know if we should be giving away all of our trade secrets, but hey, we're an open book, right? If you're the business owner, if I'm representing the business owner, and let's just use round numbers and say that that valuation comes back that the business is worth a million dollars. So, after payment of all outstanding balances on the books and liabilities and accounting for inventory, assets, goodwill, the whole nine yards, a million dollars. Some people would look naturally at that and say, "Okay, gosh, I owe my spouse $500,000." If you got the right attorney, no, you don't. If you are the business owner and you're going to maintain that business as a going concern after the divorce, which means you got to meet payroll, you got to pay the expenses, you got to acquire customers, you got to service those customers, you've got to continue to generate income, then you should get a discount out of the buyout to account for that. So instead of your spouse getting 500,000 which is half the value of the business that should be heavily discounted. And there's a range of what customary discounts are. I would say they range anywhere from the lowest at 10% which is really on the low end up to maybe 40% sometimes 50% depending on the type of business we're dealing with. But you would want that discount applied before you start buying your spouse out because you do have to maintain that business going concern. If you're the person getting bought out, you want the highest number possible. And if the other attorney doesn't provide for the discount, good for you. >> Yeah. And no matter which side you're on, remember that this business buyout is also tied to any request for alimony because if you're getting bought out at 50%, but then they're paying you alimony out of their what is technically their 50%, that person's double dipping. So depending on whether you're the person seeking an alimony award or not, remember those are tied together. That would be technically improper to get half of the business buyout and then still get alimony on top of it. But we see people make that mistake. >> That's right. And so let's talk about the big no no situation real quick. I think we'll be remissed if we don't circle back to this because we flagged them early. We said, "Oh, we both rolled our eyes and said don't do this." So let's at least tell them what we're talking about. I can't tell you how many clients I've had where we have a marital joint business and both parties are adamant that they can't run the business without the other and they're like, "Why do we have to divide the business? Why do we have to sell the business? Why should we give it to one person and buy the other person out? We want to continue to jointly own and operate this business just like we always have as part of the divorce." >> Yep. >> Now, number one, it's a horrible idea. Okay? Because when things go south, I'm not even going to say if things go south, business partners have disputes all the time. You have separate lawsuits all the time involving dissolutions of businesses between partners that get on the outs. >> Yep. >> And they need to divide their business. So now you're setting yourself up for another lawsuit. If you couldn't work your marriage out together, what makes you think you can successfully operate a business together? Right? So you're already at a severe disadvantage. So, what happens is things go south for whatever reason and now you have to come back to court and file a brand new lawsuit or maybe even a contempt case in your divorce depending on how your attorney structures that final order. You may have two different cases. You may have a business dispute case and you may have a contempt case and in the divorce case or from the divorce court and now you're back in litigation trying to untangle and unravel what we could have done as part of the divorce. >> Sure. And I do want to say because I have one friend who I know actually watches and she and her former husband do still successfully own their business. So I do want you to know that in the rare rare rare occasion, we always advise against it, but in the rare occasion that it happens, it is a legal option. I told you the judge can make you sell the business, but at the same time, you can elect to continue to jointly own and operate the business. we advise against it, but I do know one person who will laugh at me if I don't say that it is technically doable and in at least one case in this whole state, um it is still actively working very well. >> Well, and I'll echo that you can, but I'm also going to say it doesn't mean that the judge will sign off on it. So, I will say some judges will. So, if you're adamant that you and your spouse are going to be best friends afterwards and y'all can own the business together and you're both adamant that's what you want to do, we can and will honor that request at the end of the day. Remember, you guys are the boss, right? We give our advice and then y'all make the final decision. So, we have and I'm sure we'll do it again in the future drawn up agreements where parties jointly own a business after the divorce. But, I will say that is subject to the judge's approval and some judges will sign off on it, some will not. So, don't get upset with your divorce attorney. If you are one of those folks that want to continue to jointly own and operate a business together post divorce and your attorney drafts up the paperwork and the judge doesn't sign off on it, doesn't mean that your divorce attorney did anything wrong. It means the judge doesn't want to see you back in court and they're anticipating that if the judge does this that you'll be back. And judges do not want to see people back because they have so many cases. >> And I do want to say it depends number one on the judge. Yes. but also on did this was this presented to the court as an uncontested divorce or has this been a contested litigation and this is the ultimate result because I would submit that if it's an uncontested divorce the judge has an inclination hey these parties actually do work well together clearly I've never seen these parties the day that they filed the divorce they also gave me settlement documents that is probably a more likely scenario if you have been before this judge for a temporary hearing for a motions hearing they know your name and they know your face when you walk in and then you suddenly say, "Oh, but we're going to jointly own and operate this business together." That judge is very unlikely to sign off on that because they're like, "I've seen you too many times. If I recognize you in the grocery store, no, you cannot." >> Yeah. And and I I agree with that and I will go on record to say I've done it both ways. Um I have signed off on agreements and prepared agreements for clients where they have jointly owned and operated the business. And some of those folks I've seen back for subsequent litigation. Other folks I've touched base with them and the business is still running and they're able to successfully operate it. So you get to make that call. We will back your play either way. I think the important thing is that you need to be armed with the knowledge to make an informed decision. I think we've done that today in this podcast. We frankly covered more for this topic than I thought we would. So um your business represents years of hard work. Uh it deserves protection. Uh we certainly help our business owner clients safeguard their assets and safeguard what they've built. Uh be sure to subscribe so that you're first to get notification of our future podcast either on YouTube or your favorite podcast platform. Thanks for joining in. We'll see you next time.