3. Understand the Financials
Understanding the finances and operations of the underlying business is one of a commercial lawyer’s most important tasks. When it comes to business divorces, irrespective of whether the company is making money hand over fist or teetering on the edge of bankruptcy, the company’s books and records (e.g., QuickBooks, financial statements, bank statements, and tax returns) tell the story. For help understanding what those books and records mean for a departing business owner, accountants are a business divorce lawyer’s best friend.
Accountants, like lawyers, have varied skillsets and expertise. Understanding the circumstances that led to the business divorce and what the client hopes to achieve in the process will inform whether and how one or more accountants can add value.
In hostile situations, such as where one business owner believes another is stealing or diverting business opportunities, engaging an expert forensic accountant early in the process is often critical to understanding the business’s true financial position, including untangling any complex transactions or structuring that otherwise may make it difficult to “follow the money.” In amicable separations that are unlikely to spark litigation, expert business accountants can help with a variety of issues that may arise in the process, ranging from differentiating between the value of the business as going concern and the value of a departing owner’s minority stake, to modeling the business’s future cash flows to assess the feasibility of a payout over time in a situation where the business will continue on without the departing owner. Even if the situation does not call for forensic accounting or business valuation expertise, the business owner’s personal accountant should be involved to help advise on the tax implications of any buyouts, write-downs, and other personal income tax issues that may come up and to ensure that any resulting transactions are structured in the most tax-efficient way.
Clients may be wary of adding another professional to the team, particularly at the outset of a representation. It is unquestionably an added expense but is usually worth it in the long run.
4. Ascertain Your Client's Exposure
Business owners often approach these situations thinking only about how much money they are entitled to for their stake. It is hardly, if ever, that simple.
Particularly in the context of contested expulsions, business owners are liable to fall prey to believing that the other owner is the only one with something to lose. Often that is not the case. Allegations of wrongdoing are typically met with allegations of wrongdoing. For example, when one partner criticizes the other for having his child on the business’s payroll and health insurance for a no-show job, don’t be surprised when your adversary responds by carrying on about your client’s use of the company credit card, and the car lease and cell phone for your client’s spouse that the company has been paying for years. Avoiding getting bogged down in what amount to trivial expenditures of which both sides are guilty is usually the better part of valor, but sometimes it is unavoidable. Always be prepared for a two-way fight.
Potential liability also lurks in amicable separations. Particularly in the small business context, company credit cards, bank loans, and leases often require personal guaranties from the individual business owners. Those creditors may not be inclined to release departing owners from outstanding liabilities, especially if the business is in financial distress. Remaining on the hook for the debts of an ongoing business over which you have no control is a risky proposition, and indemnifications are only as good as the solvency of the indemnitor. Eliminating all manner of risk is not always possible, but the departing business owner must understand the full nature and extent of that risk when making any final decisions on how to separate. Similarly, the lawyer needs a complete picture to include protections where possible.
Most important of all, it is crucial that the business owner try, as hard as it may be, to maintain a businesslike demeanor and remain focused on achieving the desired objective. Business divorces can be expensive, time-consuming, and extremely emotional ordeals for all the parties involved. It is far too easy for some business owners to get so wrapped up in the fight—wanting more than anything else to “win”—that the costs render even a successful outcome a pyrrhic victory.
Business divorces require a deep understanding of practically all aspects of commercial law, ranging from litigation and corporate governance to tax and restructuring. It is a full-service practice area that requires a full-service team. Lawyers and clients alike are best served by leveraging the expertise of a variety of legal and financial professionals so that the myriad issues that may arise in the process are thoroughly explored and addressed.