Let's face it: even the most hard-nosed of CEOs, the ones who get everything in writing, become trusting souls when approaching the altar. It just isn't very romantic to proffer a prenuptial agreement with the marriage proposal. So, unless there is inherited wealth, any discussion of who owns what, and who gets what in the event of a split, is usually avoided. Similarly, postnuptual agreements are shunned for their potential to become self-fulfilling prophecies. Who, being of sound mind and relative marital bliss, goes to a spouse and says, "Honey, let's talk about what would happen if we got divorced"?
Of these estate-planning devices, the most common is the buy-sell agreement, which aids an appraiser by setting out at what price company stock can be purchased. Still, such a document can be worse than useless to an entrepreneur facing divorce if it contains vague formulas or outdated figures. That's why many attorneys and accountants are recommending the inclusion of a sunset clause on any such agreement, reasoning that it's better to have no buy-sell than to be governed by one that is out of date.
Some experts also recommend that the buy-sell, which was designed to deal with probate issues, be worded to address divorce directly. One variation would have the entrepreneur (or other stockholder) facing a divorce sell all shares to his or her partner immediately, at a set price.It would appear that such a technique, while not defeating a spouse's claim to the economic value of the equity, would keep the company from becoming the battle-ground on which the divorce is fought. Then again, such a technique would require entrepreneurs to do precisely what they don't want to do: sell out.
Absent any strategic or financial benchmarks to guide the process, it's up to the appraisers to determine exactly how the company should be valued. While appraisers would have you believe their profession is more of an exact science than an arcane art, even the terminology is subjective. "Weighted averages" and "multipliers" sometimes turn out to be the result of the appraiser's conversations with nonspecified "experts in the field." Such buzzwords as "going concern value" (the inherent value of a business when all tangible assets and people necessary to operate the company are in place) and "goodwill" (usually defined as the company's name recognition, along with its perception in the communicty as an entity capable of delivering quality goods or services) are catchall headings that can be made to cover whatever the appraiser and the divorce attorney want them to.
However, it is probably better to try to make the best use of all this imprecision than to rely too much on overly rigid methods. There are horror stories of entrepreneurs whose businesses have been "appraised" with only a balance sheet and an income statement as guides. Others have seen supposedly knowledgeable appraisers cop out and value their companies according to Internal Revenue Service criteria, which require closely held companies to be compared with publicly traded entities in the same industry -- a method that makes guesswork look scientific.
Perhaps most exasperating of all, appraisers don't look at the company through the founder's eyes.They value the business as a buyer would, maximizing profit potential, minimizing management expense, and paying no attention to tax rates that encourage entrepreneurs to do the opposite. "If I see a CEO taking compensation worth $500,000 a year, I may add the perks and some of the salary back into the company and, based on market rates for managers in that industry, show compensation worth only $150,000," explains Neal Fisher, a Chicago CPA at Miller, Cooper & Co., whose specialty is appraisal. That's good news for a CEO interested in holding alimony payments down by showing less income. For those whose main concern is the disposition of the company and the size of the cash settlement, the news can be very bad. That's $350,000 more to add to the company's operating income, which, when looked at by an appraiser, says Fisher, can result in an increase in the value of the company that could be several million dollars.
TEN THOUSAND BUCKS A MONTH in support? Just petty cash to you, huh, fella?"
Joe DuCanto, a Chicago divorce lawyer and tax expert, it teasing one of his carriage-trade clients on the telephone. His firm, Schiller DuCanto & Fleck Ltd., represents many business owners, and the planning advice he gives his clients is unfailingly tough, traditional, and proentrepreneur: stay away from joint tenancy, in which marriage partners are also legal business partners. Joint tenancy automatically makes the company divisible marital property. And if divorce is in the offing, do the utmost within the law to "protect the flagship" and to "shield your interests from possible fragmentation."
But don't ask DuCanto's pity for the poor entrepreneur. "I represent both sides, and it's the wife, the nonoperating spouse, who really takes it in the chops. He [the entrepreneur] has an election of remedies that she doesn't." Partner Donald C. Schiller, chairman of the American Bar Association's Family Law Section, agrees. "He has the resources. He knows what is -- and isn't -- in the books. He also knows that, no matter how much he's bragged about skimming or unreported income in pillow talk, she either won't go after it or won't find it."
Won't go after it, Schiller says, because she doesn't want to go to jail: she may have either participated in her husband's scams, or by signing joint tax returns, could be shown to have had actual knowledge of his hijinks. Won't find it, DuCanto adds, because only the most vindictive -- and independently wealthy -- wives will dig deeply enough to prove their suspicions. Schiller DuCanto & Fleck stands ready to track down "every last 50? piece." Their appraisers have been known to confirm the unreported income of a pizza parlor and the falsified sales records of a bar by counting cardboard rounds and swizzle sticks. But that sort of financial spadework is expensive and still may not unearth what the entrepreneur has buried. "Many of these guys have been getting ready for divorce for years," says DuCanto.
