25. How is a Business Split During a Divorce?

Sydney Mitchell:

I think I’m starting to see, through all of our conversations have seen this, but there are so many parts and pieces to this process that nobody would have any idea that they’re going to have and hold responsibility for when getting a divorce. So this is, again, I think one of those things, you know, it’s like, who knew about this? I didn’t. Yeah,

Matthew Brickman:
Right. I mean, you know, and, and that’s why, you know, for example, when I got divorced in a one, we did not own a home. I did not have a business, did not have any retirement. So it was pretty simple. What are we doing with the apartment that we’re renting with the cars that we don’t own? Cause we’re still making payments to the bank. What are we doing with all of our used furniture? Well, that’s pretty simple, right? We’re not needing to know all of this stuff. I didn’t have a business. Like, okay, well what about this evaluators?

Sydney Mitchell:
That’s got, gotta be, it’s an entirely different world of,

Matthew Brickman:
For me it was simple. It was like, okay, well like, okay, what do I want Sydney? Basically what I took from my divorce was I wanted it. You know, maybe typical guy, I don’t know. I took my computer. I took my satellite dish, let me do my clothes. Um, and I took my car and that was it. I’m like, you know what, just give me my electronics and my clothes and I’m good to go. Other than that, I can rebuild. Uh, but, but yeah, I mean, you know, what I have as a, as a business asset is Goodwill. I am the business. You can’t really sell Goodwill because like, if I just woke up tomorrow and said, I’m no longer going to be a mediator, there is no business. Like I am the business. So how do you evaluate that? It’s very, very, very difficult.

Matthew Brickman:
If at all, like your typical now let’s say for example, that I have a tree trimming business, so I don’t have a building, but I have a storage unit. Fine. I’m renting it, but I’ve got vans. I’ve got equipment. Okay. So then that stuff is all valued, but you know, you value that at fair market value. So fair market value is what would you get at a garage sale for it? Where would you get it CarMax for your vans? What would you get from, uh, you know, uh, Craigslist, Facebook marketplace? What would you get from a pawn shop for used equipment?

Sydney Mitchell:
So that’s the standard expectation

Matthew Brickman:
That that is how you would value those things. Um, but yeah, I mean, a business started during a marriage as a marital asset that then has to go through, um, that now, um, I did a divorce recently with a doctor and so, you know, he has a practice, they own the building, he’s got employees, they generate money. So the, so the husband and the wife agreed to a value for the business and agreed to how she was going to be paid her equity interest in the business. If they had not done that on their own, well, then they’d have to hire a business evaluator expert who would come in and say, okay, well this size of a business doing these rags, you know, they would look at all the business, right? Like not, they, you know, they would say, okay, well maybe the business pulled in a million dollars, but maybe it took half a million dollars to run.

Matthew Brickman:
So the businesses worth half a million dollars. Right? Well, so then the wife’s portion is $250,000. So, but they would come in and have to do that entire valuation. Those are expensive. I mean, I’ve, I’ve seen business evaluators just start at about $7,500, um, to come in and do those things with, usually with them. Usually you got to and why would you have to, well, the husband’s going to get a business evaluator and the wife doesn’t trust us. So the wife wants one, I have a battle of it. Right. I mean, it can get very, very expensive.

Sydney Mitchell:
So then in the, in the, the situation that you were just sharing, you know, okay. A business made a million, they spent 500,000, you know, sort of crushed or whatever. Now each party has $250,000. So that example that you gave is a 50, 50 split, you know, is that always the case? How do the, you know, the different parties, business, evaluators, how are they working together? What is that

Matthew Brickman:
Look like? So, so, so yes, generally, if it’s, if it’s a marital portion, if there’s no marital dissipation in ways, you know, none of that stuff in Florida, it’s 50 50. Okay. So they would, so they would be splitting that in half. Um, now how was, you know, um, now are the business evaluators working together? Generally not because they’ve got competing interest. One is trying to get the most one was trying to get the least, they’re looking at the same information, but they’re not working together. I mean, they’re there. I mean, like if, if they had to go to court, you’re probably going to get conflicting testimony. One is going to say, well, we actually think that the business is worth this because one of them going to try to say, well, this isn’t an expense. That’s not a real expense trying to get the value higher and higher and higher. Of course it’s decided in court. What’s that?

Sydney Mitchell:
So who then at the end of the day, you know, looks at, I mean, essentially what the business evaluators. Okay. So it ends in court.

Matthew Brickman:
Yeah. I mean, and so that can be very expensive by the time you get, because at that point you probably don’t just have business evaluators. You probably have forensic accountants too. And that forensics are working with the business evaluations because the business evaluators will simply come in and do the evaluation, give it to the forensic, to then plug into, then do all of the books and the records and the spreadsheets, and look at all the expenses and the incomes. And what’s allowable for deductions. What’s not allowable, you know, and here’s the other thing. And I’m just going to digress slightly because of the business. When you look at valuing a business, there are things that I I’ll, I’ll talk about my business again. Okay. So in my business, under the IRS code, there are things that I am allowed to deduct in my business legally under the IRS. So for example, I can deduct, uh, you know, now that we’re now that we’re virtual and I’m working in my office at home every day, I’m able to deduct a portion of my rent for that space under the IRS code. Um, I’m able to buy my computer. It’s a tax deduction, my cell phone tax deduction. Um, um, when I’m driving to work, I can either do mileage,

Speaker 4:
Um, or, um,

Matthew Brickman:
Uh, there there’s something else. I forgot what it is at the moment, but there, there, there there’s two different ways to do with the car for a deduction, um, there. So, so basically, you know, you know, some of my clothing, some of go, you know, depending if I like, like, if you and I are going to go out to dinner and, um, and we are, you know, discussing future podcast stuff and we’re working, it it’s it’s work. It’s not just, Hey, you and I are just going to go have dinner. Right. Then it’s a business dinner. Okay. Well then I, you know, there, there are things that under the IRS code that I can write off, okay. Now when I get divorced, those things might be legally able to write off, but anything, anything that reduces my living expense can be added back to my income for alimony and child support purposes.

Matthew Brickman:
So for example, that w that, that deduction for rent, that I get an IRS deduction for, well, that reduces my living expense. Will that actually gets added back for child support purposes or alimony purposes, but later on, well, well, so yes and no. Um, a lot of people, a lot of business owners argue in mediation with myself and with her attorneys that, Hey, these are my business expenses. Therefore, I don’t have enough money at the end of the month, because look, you’re allowed to write off a lot of stuff through your business, but if it reduces your living expense, if it’s stuff that on a normal course, like for example, Sydney, you pay for your cell phone bill. Now for me, my company pays for it. Well, you know, what if I didn’t have a company, would I have to pay for it? Yes. So that gets added back to my, to my living expense.

Matthew Brickman:
It reduces my, so you look at well, what would you normally have to pay for that? You can write off legally, but if you didn’t have any you to act like I’m following, I’m following things, get added back. So for example, I’ve, I’ve let me go back to that doctor scenario, let’s say that he’s, he’s most likely writing off a lot of stuff through his business that he’s allowed to, but for alimony and child support purposes, if it reduces his living expenses, it gets added back to his income. And all of a sudden, yes, she may get 50 50 in the business, but now that increases his income. And we have to look at that analysis for child support and alimony purposes

Sydney Mitchell:
Instead of his income, without those expenses having been accounted for. Right.

Matthew Brickman:
And so, you know, and, and, um, I had a lawn guy recently that, that, yeah, with his expenses, he had about $500 surplus at the end of the month with his, you know, personally. But then when we went through his financial affidavit and said, no, you know, this would be added back. That would be added back. We started looking at his, at his bank account, be like, no, you got to add your cell phone back. No, you can’t write off your truck because you would normally have to pay for a truck. Well, he had about $2,000 surplus, but legally then he was going, but Matthew and he was telling his attorney know, like these are actual deductions for my business under the IRS. We’re like, absolutely, but not in family court. It’s different. They get added back if they reduce your living expense. So, you know, again, it not so simple, I mean, is it isn’t, but you know, if you have a business started during your marriage, just know, you know, we’re going to have to go through the evaluation of, you know, do you have a building?

Matthew Brickman:
Do you have assets, or here’s another thing you got liability. Some people take out loans for their business. So, you know what, um, you might not ha you know, your business might generate income, but you got a loan to your business. Well, you know what, that could either lessen the equitable distribution of the spouse’s portion to that. So for example, that doctor, if he took out a loan for the building to buy the building and he’s paying that loan every month, well then the wife, his wife’s responsible for half of that loan because it’s a marital asset. It’s a business started during the marriage, or that’s deducted off of her marital portion. And so maybe she doesn’t get 250,000. If the loan was say maybe a hundred thousand, well, she’s responsible for 50 and actually gets 200,000 and he’ll take 100% of the loan, you know? So these are there’s. These is just part of the entire equation of figuring out. Yeah.

Sydney Mitchell:
Well, our next question, I don’t know, maybe you’ve already answered it by this point, but I want to ask it, I’m a middle aged man over 40 with assets and a business. What do I need to know from a legal standpoint, if I were to consider getting married in the near future?

Matthew Brickman:
Well, if you’re looking to get married, um, just know that everything that you’ve got and, and, and yeah, we, we did touch on it, but I’ll just reiterate everything you’ve got premarital is yours. Um, so could she ever take the business? No. Um, sort of similar to like a house, let’s just say Sydney, that, um, that this guy, this middle-aged man over 40, let’s say that he owns a home and then he gets married and then he refinances the home and makes it a marital asset. Right. Well, okay. Now it’s marital, you know, she’s entitled to half of it. Did you just, that, that’s just how it is, but let’s say that he didn’t make it marital, you know, he, he kept it separate. He kept paying at whatnot. Well, then, you know what, she could never take the home, but she is entitled to half of the marital value of the home.

Matthew Brickman:
Well, it’s very similar to the business. Could, you know, could she ever take the business or the assets? No, but she would be entitled to the marital portion. Um, maybe, maybe, maybe he’d want to consider getting, uh, a premarital, um, or a, uh, I, uh, yeah, yeah, a, a, a premarital agreement that says, Hey, you know what? What’s, you know how, however, however he wants it, uh, a, a, uh, uh, that, that, that might be a good idea. I mean, it, it really depends. Um, he may, he may not care. I don’t know, but I mean, he just needs to know, no, this guy needs to know from a legal standpoint, what does it need to consider? It needs to consider, you know, what do you know? Is it a marital asset? Non-marital asset. If he, if he wants to keep it non-marital well, then he’s got to keep it.

Matthew Brickman:
He’s got to keep it completely separate from everything else, all accounts, all my eyes and keep, Oh my gosh, Sydney, it’s so incredible. I cannot tell you how many people use their PR there, including may back in the day. Cause I didn’t know better when I first started a company until I got my accountant. Your business is not your own personal piggy bank. Like people use their businesses like their own personal data. They don’t have good records. They don’t know what they’re doing and that just muddies the water. So I would say if you’re going to, you know, from a legal standpoint, what would you consider, consider getting all your books and records on board up front, fully organized, visible accountant so that everything is clearly identifiable before you get married, even if you’re not going to do, um, a, uh, a, a prenuptial agreement, definitely just, just from an IRS standpoint, just from just knowing your business, like, be it a, be a good business owner, know your business, get a good account.

Matthew Brickman:
Uh, so you can clearly identify and keep everything separate. Don’t get even blurrier publish, pay, you know, put yourself on payroll, pay your taxes. Like, yeah, it’s just, yeah. I mean, cause like when, when I remember a number of years ago when I found, um, when I found my account Roland manual over in Palm beach, phenomenal, phenomenal guy, uh, I gave him all my books and he’s like, Matthew, what do you do? Like, I mean, like, I mean, I had, I had done some pretty creative. I, I call it creative accounting. He goes, no, this is just not right. Um, but I did a lot of creative accounting they have, but, but here’s the problem, Sydney. I had to pay him to clean it up before he could even get things. Right. Well that just cost me more money. Exactly. Because he’s having to spend time trying to figure out what I even did so he can create it and put it on the right track.

Matthew Brickman:
I just made it very difficult, very expensive. So if you’re going to get a business, be a good businessperson, get your books organized if you don’t know how to. I mean, and, and, and, and I don’t even know if properly is the right word, but if you don’t know what you’re doing, uh, to run your own books and you know, whether it’s quick and QuickBooks, whatever, definitely get, get an accountant to do it for you to do your, um, to do your profit loss monthly, to do your payroll, make sure everything’s on board because yeah. A lot of time and money in the future. Yeah. I mean, be preventative. And instead of doing damage control, because it can be really difficult to undo that and which I do as you may think that you did everything right. And you know, then you get married and you didn’t do anything.

Matthew Brickman:
Right. And all of a sudden what you thought was yours is now ours, which half of it is now hers or his. Um, and this goes for men and women. I mean, I’ve, I had one recently where the, where the wife had a yoga studio, well guess what? He’s, you know, he’s entitled to half of it. You know, he w he works for FPNL. And so, yeah. Okay. He had, you know, he had a pension and retirement. Okay, great. But she had a business, well, he’s entitled to half of the value of her business. And granted it was, you know, there’s a lot of Goodwill. She was the business. Um, but there was, you know, it’s still a business, make sure everything’s on board, even for a child support and alimony purposes, because if your books are all muddied, well, then that’s going to be very expensive, trying to figure out, you know, child support and alimony.

Matthew Brickman:
Because even if they’re not entitled to the business, or if it’s Goodwill and you are the business, if your books and records aren’t right, then you know, now it’s going to get constantly, because now you’re back to business evaluators, forensic accountants, trying to figure out, you know, like, especially when you’re running your business as your own personal piggy bank, which on point, um, it’s just really expensive to get out of that. Um, and I don’t mean like, get out of it in a way from it, but get out from under that to get everything proper so that then we can have a conversation like, okay, what is your income for child support purposes? Just a very simple conversation. Like what do you mean? Not that simple. If your books and records are not right.

Matthew Brickman:
Occasionally Sydney and I will be releasing Q &A Bonus Episodes where we will answer questions and give you a personal shout out.