Family-Owned Businesses and Divorce with Elizabeth Billies, Esq
This month we welcome Elizabeth (Liz) Billies to The We Chat Divorce Podcast!
Liz has been working as a divorce attorney in suburban Philadelphia at the firm of Dischell Bartle and Dooley, P.C. During this time, she’s represented hundreds of men and women going through separation and divorce. In doing so she has learned a few (maybe more than a few) things about relationships and the divorce process. In addition, to her family law practice, Ms. Billies also operates her blog, the Divorce Lawyer Life, where she provides her readers with practical tips to help them expertly navigate the divorce process to their best post-divorce life.
In this episode, we’re going to be discussing family-owned businesses and divorce.
- Generational family-owned businesses
- Husband and wife owned businesses
- What to look for (books & records)
- What to listen for ( what is your spouse saying about the business)
If you have questions for us or a topic you’d like us to cover, contact us at firstname.lastname@example.org or visit MyDivorceSolution.com
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Karen Chellew: Okay. Today, we welcome Elizabeth Billies, also known as Liz Billies. For the last 10 years, Elizabeth has been working as a divorce attorney in suburban Philadelphia at the firm of Dischell Bartle & Dooley. During this time, she’s represented hundreds of men and women going through separation and divorce. In doing so, she’s learned a few, maybe more than a few things about relationships and the divorce process. In addition to her family law practice, Miss Billies also operates her blog called The Divorce Lawyer Life, where she provides her readers with practical tips to help them expertly navigate the divorce process to their best post-life divorce or their post-divorce life, I should say.
Welcome, Liz. Today, we’re going to be talking about family-owned businesses. So that’s a very unique and seems to be very trending topic right now. Welcome.
Elizabeth Billi…: Yes. Thank you so much for having me. I’m really excited to be on your podcast and also talk about this topic. As we were talking before, it’s interesting how everything kind of trends. And for some family-owned businesses in divorce cases and the unique obstacles, issues that those bring up have been very prevalent recently, which has been interesting. Not COVID-related, but just have been coming up for me. So I’m glad to talk about this with you today.
Karen Chellew: Yeah. So there’s generational family-owned businesses. And then I guess the other type of family-owned business is husband and wife family-owned businesses.
Elizabeth Billi…: Yes, yes. So I’ve had the husband and wife business. I’ve had the generational business. All of these bring along their own dynamics. And then I also have had a couple recently of same generation, siblings-owned businesses. And all family-owned businesses are, first, family-owned businesses versus a business where partners are not related, so arms length, third-party businesses if you want to call it, for lack of a better word. There’s different things that you look at in a family-owned business versus a third-party business.
And then, also, if we want to drill down even further, is it the generational business, the husband and wife business and then the, I guess, lateral generational sibling-owned business or … They have their own dynamics, as well, which first of all, in the consult … So what I do when someone comes in to see me, I have what’s called an initial consult. And so we get into the assets that are owned by the couple. And right away, hopefully, they’ll identify for me the business.
Catherine Shana…: Well, let me ask you this. When you said you dropped it down from family-owned, siblings, and so forth, but isn’t it also interesting what side of the case you’re on? [crosstalk].
Elizabeth Billi…: Oh, for sure. Yes.
Catherine Shana…: Because that’s another segment I would like to [crosstalk] today.
Elizabeth Billi…: Definitely. Access to information is key or lack of access to information is frustrating. And perspective-
Catherine Shana…: [crosstalk]. Mm-hmm (affirmative).
Elizabeth Billi…: Yes. And it’s also interesting when you have the business owner … You’ve got access to the books and records to the business. We can talk about specifically what those kind of documents are and what I recommend people should be looking for when there is a family-owned business involved, but books and record, in general, for right now. So when you have access to the books and records, your job is easier. When you don’t have access to the-
Karen Chellew: So what do you look for? [crosstalk].
Elizabeth Billi…: Sure. So it also depends on whether or not you’re working with a business valuation expert because they will … Generally, what I do is I know I’m going to hire a business expert to value the business or I think I’m going to need one because, some businesses, it’s not clear right away if it’s a marital asset or if it’s just an income stream because … And [inaudible] as you said, I’m barred in the State of Pennsylvania, so I’m going to talk about Pennsylvania law specifically. There is some differences in states versus how you value a business and whether or not a business is a marital asset and whether or not the whole business is a martial asset. It’s called enterprise goodwill versus personal goodwill.
So personal goodwill in Pennsylvania, you can’t divide that. It’s not an asset to divide. Enterprise good will is divisible. So in some states, the whole thing is divisible. Some states have different views on personal and enterprise goodwill. So I will preface this with that caveat.
Catherine Shana…: Well, just to clarify that for our listeners who may not know, personal goodwill is if you are a hairdresser and that business is run by just you cutting hair or it’s a personal … Can you just further define how you would look at personal goodwill?
Elizabeth Billi…: Mm-hmm (affirmative). Yeah. So personal goodwill, I always say, is it is whether … I always use a dry cleaner as an example. I don’t know why. I just do. Personal goodwill is someone coming to this business because of me. The hairdresser example is primary. What could I sell as a hairdresser? If I was selling my hairdresser business, what am I selling? Right?
Karen Chellew: Shampoo.
Elizabeth Billi…: Shampoo, my hair dryer. Maybe I [inaudible]. Usually, you’d rent a chair, you rent a space. There’s not much to sell. You’re not really selling your book of business just because my clients aren’t necessarily going to stick with you. They don’t have a contract with me to cut their hair. They go with me because I do a good job. They like how I cut their hair. That’s personal goodwill.
Catherine Shana…: What about the owner that says, “Well, I own this business and they’re only coming because of me. They know nothing about you, as the spouse, and they’re only coming because of me,” when in reality, that might be their personal perception of the business, but [inaudible] there’s not a contract with husband or wife? It is just they like the service it provides and, if they sold it, if it’d provide the same service, it would get it.
Elizabeth Billi…: Well, I actually had a case like that. I had it with a dentist. And so he owned the dental practice, owned the business that the dental practice was in, obviously owned the equipment in the building, but there were other dentists in that office. So the question was, if husband stops being a dentist at that office today, would everybody leave? And the answer was no. Now, he’s a great dentist. Even my client, I represented the wife, thought he was a great dentist. Apparently he’s very … I have not used his services, personally, but he had great recommendations. So maybe some people would leave, but in reality, most of those people are going to probably be subsumed by the other dentists there. The people like the location, they like the hygienist. As we all know, the hygienists spend a lot of time with you, more than the dentist does usually.
So in that case, we found, okay, there is probably a portion of the value that is personal to that dentist, but the overwhelming value of that business was enterprise goodwill. And we hear that all the time.
Catherine Shana…: So as a tip, if you’re listening and your spouse tells you that the business would go away because they’re not there, don’t necessarily believe that.
Elizabeth Billi…: Definitely don’t.
Karen Chellew: Get that [crosstalk].
Elizabeth Billi…: Definitely do not. I hear it all the time. And particularly, if you have a brick and mortar location, that’s generally not going to be true because people, going back to my dry cleaner example, people go to that dry cleaner. Yes, they clean your clothes. That’s great, but it’s also where the dry cleaner is located. It’s also whether or not they can get my shirts starched in 24 hours. The lady behind the counter is certainly lovely, but that’s not necessarily why they’re going there.
And so then there’s business [inaudible]. So one way, that’s all enterprise goodwill. Everyone’s a cog in a wheel. Then you’ve got the solely personal goodwill, which are generally really one-man band, one-lady band, general contractors, landscapers sometimes, just really a revenue stream. There’s really no assets of the business. That’s a personal goodwill. And I’ve been doing this a long time. I’ll always check it with a business expert if I’m unclear, but there’s certain ones it’s pretty obvious to me.
And then there’s the ones that are probably somewhere in the middle that are … maybe there’s a little bit of personal goodwill with the owner or spouse, but majority of it is enterprise goodwill, particularly if there’s significant physical assets and contracts.
Catherine Shana…: How do you define enterprise goodwill, now that we defined personal goodwill?
Elizabeth Billi…: Sure. So enterprise, when you do a business valuation, you’re looking at what a willing buyer would pay for this business. So what could I get for it if I sold it? They’re not getting me. Right? So what are they getting if I’m out of the picture? As the owner, what am I selling? Is there contracts? Is there a brick and mortar location? Is it a manufacturer or some kind of company that has significant assets, equipment? Dental practices, they have chairs, they have X-ray machines. There is physical assets in that business. So what could somebody buy? That’s an enterprise goodwill. What am I getting as a third party over here?
Now, what’s interesting with family-owned businesses is … And let’s talk about the husband and wife business. You might have two sets of personal goodwill and that’s interesting. And then-
Karen Chellew: You mean, that each bring to the table.
Elizabeth Billi…: Exactly, exactly. You don’t know. Let’s use a bakery as an example. Maybe wife is the pastry chef, but husband is the marketer and he’s the one who gets the contracts or he makes some other kind of food. She does the pastries and he’s the great coffee maker. So without one of them, the business now is only half of what it was. It doesn’t have that person there anymore. That’s a really interesting argument and a really interesting thing to try to tease out what everybody’s personal goodwill is.
Most cases, you’ve just got one person. I’ve had husband-and-wife-owned businesses. The majority of them is one person. One half of the couple is in the family-owned business usually, with parents, is usually the number one that I see, generational businesses, but the husband and wife-
Catherine Shana…: [crosstalk]- Go ahead.
Elizabeth Billi…: And that brings itself, again, another family dynamic, especially if you represent the person who’s not in the … the spouse. So just recently, I had one that was an intergenerational business with parents and son. And it’s, what does wife know about the business? They were married a long time. What does wife know? And so I was on that side of the dock. I was on the side of the business owner. So I had access to the information, I had access to the parents, I had access to the controller, the business accountant, the tax preparer. Wife doesn’t have access to any of those things and that’s very common. When you have an intergenerational or a sibling business, the non-business-owner spouse is out, but what they do have is what they remember from the marriage. And so that’s where they may not have been involved in the day to day, but they know something.
Karen Chellew: Particularly the lifestyle.
Elizabeth Billi…: And also, the number one thing that you hear about in businesses is cash. Always hear about cash. It’s always cash, which I have found, as we’ve moved to almost a cashless society at this point, there really isn’t as many cash … I mean, the pizza shop is always the example that everybody uses, but most businesses now, there’s just not as much cash anymore, but you’ll hear about cash. You will also hear, and this is one of the issues for a family-owned business that you see as different than a third-party business, is running personal expenses through the business. That is something that the non-business-owner spouse is going to know about. They know who is making their car payment. They know who is paying for the family trip to Disney that was a business retreat. They know all that stuff.
Catherine Shana…: Right. What if you’re the spouse and you assume that your husband or wife, whoever it is, puts his shares back into the parents’ name in this generational business in preparation of divorce. How do you prove that?
Elizabeth Billi…: So divorce planning, I have to say, divorce planning happens less than people think, in my experience. People think people plan. Also, divorce planning is super obvious. Because we’re not in a cash-based society, if you transfer money out of an account, it’s super obvious because it’s a transfer. There’s documents for everything. So if someone transfers their shares … And this is an issue also for support and retained earnings. Retained earnings is another divorce planning tool that you will often see in a family-owned business, but if someone were to transfer their shares back, you’re going to look at, well, why did they do that? What was the reason?
And what’s the proximity to the date of separation? So if it’s six months before, red lights are going to go off. Why would you transfer it back? I sold my shares to my parents. Why? Usually, it’s the other way around. Did I sell it because they loaned me money and that was my way to pay them back? Was this an inheritance scheme, which you see a lot in intergenerational business? Usually, you see this stuff go the other way, is that this is all for estate planning purposes, not divorce planning, but estate planning. So what’s the reason?
And really, documentation in these businesses is key. It really is. And so it never ceases to amaze me how businesses are run. Some are run really well. Some are run, “I don’t know what you’re doing over here.” I think people think, and maybe you guys have seen this, having messy books helps them. I say the opposite because, if you got messy books, your credibility with the court and the ability for your spouse to make allegations and you can’t prove otherwise is worse for you. I don’t know. I just have [inaudible], so I don’t know if you guys have seen it, but I’ve seen people kind of go the opposite way.
Karen Chellew: So many businesses, yeah, to your point, run their entire life out of the business.
Elizabeth Billi…: Mm-hmm (affirmative). I mean, I had-
Karen Chellew: [crosstalk] to rely on the K1 or the schedule C as-
Elizabeth Billi…: Right.
Karen Chellew: -of the income. And there’s also, then, that’s where the term net income available for support comes in.
Elizabeth Billi…: Correct.
Karen Chellew: And so can you talk about that as it relates to the business valuation and the income stream?
Elizabeth Billi…: Sure. So first, to kind of start with the premise of it can only be an asset or income. You can’t double dip. So if we’re looking at the value of the business verse its … There’s the value of the business, but there’s also income to the business owner as that net income available for support. You always want to make sure you’re not double dipping in that way. And then the biggest two issues I see with business owners and net income available for support, maybe three, is reasonable comp, reasonable compensation, are you being underpaid or overpaid? Because it can go both ways.
Karen Chellew: How is that determined?
Elizabeth Billi…: Depends on what you’re doing for your money. Let me give you an example. I had an intergenerational family-owned business. And it wasn’t my client that was being … He was actually being paid relatively appropriately. His father was getting a very large salary. His father is retired to Florida, and yet, he’s getting paid more than my client. So the argument is, is my client’s comp reasonable? Should he be getting paid more because he’s doing more work and this person’s getting paid more than him for doing less work? Well, that’s an easy one. He’s the founder of the business. So you can make that argument, but I think that there’s … And he’s the straw that stirs the drink, so to speak. He’s the rainmaker of that business. So he’s going to get more money because, ultimately, he’s the reason that the business exists.
So you can see a reasonable comp go both ways. Also, you’ll see maybe the parents are overpaying their child because the child has a lifestyle that they want to continue to live and the parents are indulgent and they own this business and money is good. And so they’re willing to overly compensate their child because that’s their way of just, I don’t know, kind of a weird way of giving gifts, but via this compensation, but then what you’ll see is, and we always joke, it’s called RAIDS, recently acquired income deficiency syndrome. And all of a sudden, “Oh, I’m getting a divorce.”
Karen Chellew: [crosstalk].
Elizabeth Billi…: But this is a terrible. This is a terrible. We lost our client. We have no money. I’ve got to reduce my compensation.
Karen Chellew: I love that.
Elizabeth Billi…: So it’s like, “Oh, how convenient. You file for divorce and now your business is in the toilet. Okay, how coincidental is that?” And so let’s look at, okay, well, did anybody else reduce their compensation? Only you? Everybody else getting paid the same? That’s interesting. So that’s going to be a red flag for me in saying … And I’ll even say it to my own client if I own the business owner. I’m like, “This smells, this smells.” If everybody reduced their salary, there’s one thing. So that’s the issue of reasonable comp, kind of those couple things there.
Then you’ve got retained earnings. This is a big one with family businesses and there’s case law in Pennsylvania about that. There’s probably case law in other states where it relates to support. And it’s leaving money in the business to reduce the distribution because most business owners, as you guys are well aware, it’s they get a draw often, a weekly or biweekly draw, which is pretty low, and then they get distributions either quarterly, annually, however the business does that. What I see is, all of a sudden, someone’s getting divorced and now we’re leaving all those distributions in the business and saying, “Oh, my comp’s only my draw. That’s it. I have no other money. That’s it. Business is bad. We’re retaining earnings.”
Now, in a reasonable business, a valuator is not going to say, in my experience, that 100% of your retained earnings need to be drawn down upon for support. There is an industry standard for most businesses, which varies, as to how much money should be left in the business at the end of the year. So usually, a business evaluator and if you hire someone to determine someone’s net income for support, they’ll say, “Okay, you should have 20% of this. You should have this much cash on hand.” Another reason some people will have retained earnings is, “Oh, we’re going to buy equipment. We need to buy a new printer.” I mean, a big printer. I don’t mean an HP, little $99 one.
Karen Chellew: Yeah, yeah.
Elizabeth Billi…: “We need to buy a printer. We need to buy a new piece of machinery to make X, Y, and Z product and that costs $100,000.” That’s a little bit more of a gray area because it’s, okay, do you really need to buy a piece of equipment? Are you conveniently saying you’re going to buy a piece of equipment? Are you just saying you’re going to do it because you want to reduce your income available for support? And then the other fun thing is running personal expenses through the business, perquisites. What’s the business pain for you? There’s some things that are going to be okay as an allowable business deduction, but there’s some things that I’ve seen, particularly in a family-owned business, where they’re running literally everything.
I had a case with a dentist, not my client, who had three dental offices. And he did not have a personal checking account. Literally, everything went through these business accounts. It was a nightmare to try to figure out what this guy’s income was available for support. And that’s where I think, also, going back to the point of your messy books can get you into trouble because, if he had kept clean books and had separated, it would’ve been a lot easier on him and I think he could’ve gotten a different result on the income available for support in his court case, but when you messy it up and you muddy it up like that, I actually think you’re making it harder on yourself.
Karen Chellew: And are they exposing themselves to tax evasion or tax fraud by bringing that stuff into court?
Elizabeth Billi…: Yes.
Karen Chellew: Is this executed upon?
Elizabeth Billi…: So it’s interesting because I have this conversations with clients all the time, is when someone comes to you with the messy books, with books that are not going to pass the smell test by the IRS … And I have had that with someone. It was revealed to me … had a tremendous amount of business that cash was still being used. He had tremendous amounts of cash in the business. The wife had pictures of the cash, so I couldn’t say there was no cash. She’s got pictures of rolls of cash in the top drawer when they were together. So if you’re trying to keep cash, maybe don’t put it in the top drawer.
Karen Chellew: At least put it under the mattress.
Elizabeth Billi…: At least put it under the mattress. And also, I tell clients, if you’re on the other side, take pictures of the cash and date it. Put a newspaper underneath with the cash.
Catherine Shana…: Yeah. We tell them that, as well, but you know what? What you’re saying, as an attorney … I’m going to be your devil’s advocate. I’m sorry. That’s what I have to do.
Elizabeth Billi…: That’s all right.
Catherine Shana…: What you’re saying and what’s so refreshing to hear you say is that you’re a logical thinker, right?
Elizabeth Billi…: Yes.
Catherine Shana…: And you’re really straightforward and you’re saying, “This is what we do and this is what we get.” Unfortunately, Liz, what we see is, again, we’re doing the financials and we see this uncover and then we see it get into the attorney’s hands and then, at the end of the day when they get in front of a masters or get in front of a judge, it’s like, “Well, we didn’t have the documentation, client. We couldn’t get you that income,” or, “You had the pictures of the cash, but you guys spent it during your marriage, so we can’t really do that.”
So what really is a good strategy to have when you’re, let’s say the spouse in this scenario, going in there with the logic, with the knowing all of this and seeing it and you being such a … Again, you’re refreshing when you speak. So I’m happy to have you on with us today because it all sounds like you know it, you got it. Right? But unfortunately, and we have clients around the nation, is that what happens when you get there that day and what is the best documentation for this person to have? [crosstalk].
Karen Chellew: Yeah. And they have very limited funds if they’re not [crosstalk].
Catherine Shana…: They do.
Karen Chellew: Yeah.
Catherine Shana…: They get beaten down or they get bullied or they get pressured into this. It’s frustrating.
Elizabeth Billi…: And that’s always the hardest part because, as you know, there are no public defenders for divorce cases. And there are no public defender business evaluators or people [crosstalk]-
Karen Chellew: Very interesting.
Elizabeth Billi…: -determine a net income available for support. Everything is money. And I was just on the phone with someone last night. And I think I’ve said this to you guys. I always do a cost benefit analysis with my clients. Don’t spend $5,000 to get $5,000. It’s a waste of time. It’s a waste of money. I know you guys do that, as well, with your clients. And so part of it is being very honest with the client and saying, “What can I prove? What can you afford for me to prove? I can’t subpoena everything this person’s ever gone to,” but what I tell clients in terms of, “What can you do to help yourself?” is a couple things and they’re free. You’ve got to be organized, but what I tell clients is, “If you know you’re going to be separating and you’re still in the house, you need to act like a private investigator in some ways.”
So a couple ways you can do that; if you are the spouse who doesn’t know about the finances, either because of a business or even just, “Where are my banks?” I’ve had people come in who don’t know where they’re banking. It was shocking to me when I started this job, I have to be honest with you. “What bank?” “I don’t know.” It was shocking, just as someone who’s interested in personal finances, very involved in my own personal finance and I didn’t see my parents run their marriage like that either. So it was very interesting, but it’s very common.
So you’ve got to act like a private investigator. You see an envelope come in from a company that you don’t know, from a financial institution that you’re like, “I don’t have an account at Fidelity,” you take a picture of it. You have a safe at home? You take a picture of the contents. I had a client who, she took pictures of bank envelopes that were in the safe. And so what I did was, okay, I asked the other side when I didn’t get statements from those banks, “Hey, does your client have an account at Meridian Bank? Does your client have an account at this …” I at least could ask the question. I at least had an ability to go and ask that question.
Catherine Shana…: We do the same thing. We don’t care if the statement’s outdated or not. If it has numbers on it, you take a picture. Yeah.
Elizabeth Billi…: Exactly, exactly. Another is, if you’re still living in the house, make copies of the documents. I know a lot of you obviously know so many things are digital. And so it’s either maybe, if you have a family computer and the tax returns are on there, you’ll make sure … I’m not saying steal it and not leave a copy for the other person. Everybody should have both copies. Everybody should have a copy, but download it. Make a copy if it’s a physical document, however you can get as many financial documents before the split because it’s a lot easier, I always tell me clients, it’s a lot easier for me to get it from you than it is to get it from the other side.
And the thing that your clients go through and it’s called discovery, I think it’s probably called discovery in most states, is it’s really hard to keep saying I know something’s out there if I don’t have a thread to show to a judge than it is. That’s why you’ve got to help yourself. And a lot of getting divorced, particularly the financial side, is organizing yourself, getting your experts, whether it’s getting your … I call it your divorce team.
Karen Chellew: Your team, yeah.
Elizabeth Billi…: And that’s your lawyer, your real estate appraiser, your financial analysts, your financial advisors if that’s something you need, a therapist, a life coach, a divorce coach, whatever it is, a business valuator. You need those people. And organize them early because you’re also going to … The more time they have to suss out if there’s cash, if there’s a tax issue, because if you’ve signed a joint return and now you’re saying that that return is fraudulent, you have a tax issue. So maybe we talk to a tax lawyer or a tax accountant before we start going there.
Catherine Shana…: That’s why we believe that people should come to us before they even go to you, because-
Elizabeth Billi…: Yeah.
Catherine Shana…: -if we get their financial portrait together and they go to you then for even your consult and they say, “Liz, this is what we have,” then you get to do your job.
Elizabeth Billi…: Exactly.
Catherine Shana…: You get to focus [crosstalk] instead of asking them, “Where do you bank?” and they’re too emotional even to answer, even if they know the answer. It’s intimidating to sit in front of your attorney for a lot of people. So when they go with our document and you get to look at it and say, “Okay. Well, this is how I’m going to help you,” [crosstalk].
Elizabeth Billi…: And I know everyone’s consults are different, but I give very … I mean, I think you won’t be surprised to know that I very substantive information in my consults. My consults, I do charge for them and I am providing a service, I believe, in that consult. The more information you can bring to me in that consult in a succinct way with your financial portrait, the better, because I can sit there and ask questions off the bat. We can have a productive, efficient conversation. And some people come to me and they’re super emotional and they spend the first 15 minutes maybe crying, maybe talking about the emotional side. And we can have that conversation, as well, but being able to come to me with their financial portrait and say, “This is what we have,” I can then start asking questions off of that.
Karen Chellew: [crosstalk].
Elizabeth Billi…: “Okay, I see you have a family-owned business. All right, tell me about that.” [crosstalk]-
Karen Chellew: And they feel empowered to tell you about it.
Elizabeth Billi…: Mm-hmm (affirmative).
Karen Chellew: They’re already coming to the table a little bit more confident than they would if they didn’t know anything.
Elizabeth Billi…: Well, I think getting divorced, and particularly if you have income-dependent spouse or the income, I don’t know, less knowledgeable spouse, maybe the one who wasn’t in charge of the finances, and they feel like they’re on an equal playing field now because they have that information and they’re going, “Okay, I know about this, too, not just you. I feel like I’m empowered to make a good decision for my case. My divorce lawyer understands me.” They’re saving money, which is always a good thing and everybody always wants to do that. And they feel like, at the end of the day … I always tell clients, “At the end of the day, however the case shakes out, you want to know what happened to you and why it happened.” And you can only do that if you have all the information.
Now, I’ve had cases where they want to turn over every rock. And there’s some times [inaudible] you’ve got to call it. And it’s hard for people because, like with the cash-
Karen Chellew: They’re emotionally attached to [crosstalk].
Elizabeth Billi…: Yeah, but you’ve got to call it. I had one client, this was years ago, she swore up and down that the guy had an overseas account. This was before FBAR and before you had to disclose it on your tax returns. This was 2007, 2008. She swore up and down and I looked. Trust me, I looked. And the guy worked for a company that was based in England and I really think that that’s where the confusion was. And I just was like, “Listen, I can’t look for this anymore. You’re bleeding money on this issue. I can’t find anything. I’ve got nothing.” There’s a point where you just kind of have to call it, but I think people feel better calling it the clearer financial portrait they have.
Karen Chellew: Yeah, because they have clarity that they’re going to be okay.
Elizabeth Billi…: Yep.
Karen Chellew: Another little layer to this is, if a lot of that work, to your point, can be done before, it’s more amiable because, once you file that divorce complaint, you’ve essentially declared war. So a lot of time, the spouses are more … Initially, everybody wants to work it out.
Elizabeth Billi…: Right.
Karen Chellew: So they’re more amiable sharing information and documentation because a divorce complaint or petition is very offensive language and you can’t help it. It is what it is.
Elizabeth Billi…: Yeah. I think I told you this story. I had a client once who wanted to get divorced. He was the catalyst for it. We had been working out agreements. We were doing … and I always call it a backwards divorce, kind of where you’re going to where you work out, you talk about the finances before a complaint’s filed. I call it [crosstalk] backwards-
Karen Chellew: So important.
Elizabeth Billi…: -which is good, backwards is good, actually, in divorce cases. And finally, we filed the divorce complaint and I sent it to him not thinking … I didn’t think anything of it and he calls me up and he’s all upset. He’s like, “I’m the defendant.” And it’s like, well, somebody has to be. I didn’t even think about it. I’m like, “Well, yeah. You are being sued. I mean, you are being sued for divorce. That is [crosstalk].”
Catherine Shana…: Well, that’s the word that the spouse gets. “I’m suing you.” “Well, no, I’m not suing you.” Well, actually, in legal terms, you are, but [crosstalk] person going through a divorce doesn’t think they’re suing the other person. We think of it as a very different term.
Elizabeth Billi…: Well, and also, some states, you almost can file it as a mutual consent. Wisconsin does that. They have different-
Karen Chellew: Florida, I think, is another one.
Elizabeth Billi…: Yeah. So they have different tracks. It’s like, if you guys are filing together, if you’re filing together with kids, if you’re not filing together. Pennsylvania is not that way. Someone has to be the defendant, but I now … It’s funny because you learn … I’ve been doing this job for 12 years, so now I always kind of caution clients, “You are the defendant. It is okay. It does not make you bad.” That’s a common question that clients ask me, is like, “Oh, is it bad if I’m not the one that files?” or, “If I am the one that files?” [crosstalk].
Karen Chellew: You’re actually saving money if you’re the defendant.
Elizabeth Billi…: Yeah. It’s just really kind of how it has to be, but I think we’ve talked about this offline, is that alternative dispute resolution is really popular right now, particularly because of COVID, because it was hard to get into the court system. It’s back up and running to some extent, but not everywhere, not every state. Pennsylvania’s in one place, whereas maybe Texas is in another place, and California and-
Karen Chellew: It could change tomorrow. Yeah.
Elizabeth Billi…: Change tomorrow. So alternative dispute resolution is really hot because it can be done over Zoom. And with mediation, if you want to go to mediation, that means you guys are already amicable. So why not come with a joint financial portrait to show this mediator?
Karen Chellew: Yeah, because if you don’t, mediation has a very high likelihood of failing because-
Elizabeth Billi…: Exactly.
Karen Chellew: -you don’t financially know what you want, know emotionally what you want.
Elizabeth Billi…: Uh-huh. And family-owned businesses are tough and I just had a conversation about mediation and a family-owned business, I think, yesterday. And it’s a question as to whether or not this wife is going to look at that as really an income stream or kind of let it go.
Catherine Shana…: Well, let’s talk about this. That what’s on my list to bring you back to, so I’m glad you went there.
Elizabeth Billi…: Yeah.
Catherine Shana…: Really hard to digest, and even for myself, personally, as a CDFA, when somebody owns a business that you’re going to say, “Let it go as an asset because you’re using it as an income stream …”
Elizabeth Billi…: Right.
Catherine Shana…: So let’s just take the case of Karen and I are getting divorced, which we’re not. Are we, Karen?
Elizabeth Billi…: Right.
Karen Chellew: Not today.
Catherine Shana…: Right. I just wanted to make sure she was paying attention to me. So we’re together 20 years and we have a business and now I’m going to pay her support, but I’m only going to pay her for five years because that’s what the agreement is. So now I’m paying her support, but you’re telling me that she has to give up the business value. So in five years, her support’s done, I still get to keep this business. So how is that fair and equitable? And is that really the scenario?
Elizabeth Billi…: Well, it depends. I know it’s just what every lawyer says, right?
Karen Chellew: [crosstalk].
Elizabeth Billi…: So it depends on whether … There may not be a value to the business. It may have only ever been an income stream.
Catherine Shana…: And how do you determine that?
Elizabeth Billi…: Again, business experts are key oftentimes in that. Some businesses are obvious. They’re obvious to me, I should say. So if it’s a one-man band, general contractor, painter, landscaper, the hairdresser example wher they’re an LLC, but [crosstalk]-
Karen Chellew: Restaurant owner?
Elizabeth Billi…: Restaurants are … maybe. Restaurants, it depends. Do you own the building that the restaurant is in? Are you the chef?
Catherine Shana…: Well, let’s take that scenario. You own the building and you owned the business for 20 years. And now you’re getting a divorce and the spouse who doesn’t work there wants to be an owner and have a support payment.
Elizabeth Billi…: Okay. They want to stay as an owner of the business. Okay.
Catherine Shana…: Or they want a buyout from the business and they want support.
Elizabeth Billi…: Right. So I would say, in that example, that you’re going to have to have that business value. When you do a business valuation and there’s also going to be a support component, that person’s reasonable comp is taken out of the value of the business [crosstalk].
Catherine Shana…: That’s what everybody [crosstalk].
Elizabeth Billi…: Yeah, because you cannot double … I’m making the hands. You can’t double dip.
Karen Chellew: Can’t double dip. Yeah.
Elizabeth Billi…: So the reasonable comp is actually a liability of the business. That sounds bad, like it’s a debt, but it’s not. It’s what you pay your employees [crosstalk].
Karen Chellew: If you’re a CEO, yeah.
Elizabeth Billi…: Yeah. In some business valuations, they will adjust reasonable comp up or down. And so whatever they determine to be reasonable comp will be deducted from the value of the business because you can’t get it twice. If it’s only an income stream, there’s no value to the business, it’s just income and then you just go down the track of support, whether there’s child support, there’s alimony, and then if the alimony’s for five years, it’s over, it’s over.
Catherine Shana…: Okay, can I stop you there for a second?
Elizabeth Billi…: Yeah.
Catherine Shana…: So this is really good information for everyone listening because these are common questions that the three of us may know, but when you’re listening, it’s confusing. So now, we have a business and it’s worth $1 million, let’s say.
Elizabeth Billi…: Okay.
Catherine Shana…: And we’re going to take a reasonable comp of $200,000 a year out of that business. So what the evaluator will do is they take the value of that business, they deduct that comp because that’s being used for support, and now there’s a net value to the company and that can be divided in equitable distribution.
Elizabeth Billi…: Correct. Yep, but then the fun part is, how are we going to divide that business up? Because oftentimes, that is the biggest asset of the marital estate.
Catherine Shana…: Right.
Elizabeth Billi…: Usually, you probably have a house and then you maybe have a 401K. Maybe there’s two 401Ks. I mean, I have to tell you, most people don’t have that much cash.
Karen Chellew: Right. They pay it over time.
Elizabeth Billi…: There’s just not the cash there. And the business, itself … So the couple ways I’ve seen it done, and these are things I know we talk about with clients is, well, is there a way to give you other assets in the marital estate? So say it’s $800,000. So now it’s a 50/50 split, so we both need to get $400,000. Is there other assets to compensate the non-owner spouse? If there’s not or we don’t like that distribution, let’s say they don’t want to keep the house, the business owner also wants to keep the house. Well, we can’t use the house now. Now we’re just down to maybe retirement. Well, the non-business owner doesn’t want only retirement, there’s no cash there and they can’t tap that until they’re in their 60s and they’re, let’s say, 45. So that’s not doing them any good today.
So what I’ve often done, as we’ll do a payout … Sometimes the business owner, I have seen, will get a loan on the business, which is fine. They’ll collateralize the business with a line of credit to buy that person out and maybe they can do the whole $400,000 that way. Usually not. So maybe they can get $100,000. So the agreement is, “Okay, I’ll give you $100,000 as of the execution of the agreement.” Property settlement agreement, for the listeners, is the agreement that says how we’re going to divide everything up. So maybe I can get you $100,000 within 30 days, based on that line, and now I owe you $300,000 more and I make quarterly payments, monthly payments. Those are not support payments. We’ve got to be clear on that.
Catherine Shana…: And you can include an interest on that, too, because [crosstalk].
Elizabeth Billi…: [crosstalk] interest. Well, and then also, you want to get really in the weeds on it is, “Okay, you owe me $300,000. What if you drop dead tomorrow?” [crosstalk].
Karen Chellew: You need insurance.
Elizabeth Billi…: [crosstalk] insurance. [crosstalk].
Catherine Shana…: Let me back that up again because … using this scenario. And you brought it down to $400,000 needs to go to each party for equitable distribution or your division or your marital assets.
Elizabeth Billi…: Right.
Catherine Shana…: To be clear, the $400,000 that the one spouse is being bought out who will no longer have an ownership, that does not get included or calculated for income purposes imputed on that side. Right? That’s [crosstalk].
Elizabeth Billi…: Correct. No, it does not.
Catherine Shana…: However-
Elizabeth Billi…: Because then that would be a double dip if you did that. So that’s why-
Catherine Shana…: However, to be clear, if the spouse is considering, for emotional reasons or for detachment reasons that, “You know what? I don’t want the $400,000. I want to be a 50/50 owner,” if they became a 50/50 owner, then wouldn’t any income she receive or he receive off of that be imputed for income?
Elizabeth Billi…: If they’re still working at the business and getting a paycheck, that paycheck is income available for support. Sure.
Catherine Shana…: Or if you’re [crosstalk]-
Elizabeth Billi…: Or your distributions, yeah.
Catherine Shana…: Right, because if you’re just remaining 50% owner …
Elizabeth Billi…: Yeah.
Catherine Shana…: So to the listeners, be careful. I know that a lot of times, emotionally, you want to stay attached to the business because maybe you don’t want the divorce or you think it’s going to be worth a lot more money down the road. That would be income for you. So it would affect your support payment.
Elizabeth Billi…: And what I would suggest, if someone’s going to stay on it … I don’t see it very often. I think sometimes people, in the beginning, think they’re going to do it.
Karen Chellew: They want to.
Elizabeth Billi…: I think they want to, especially if it’s a business that they built together and it’s been blood, sweat and tears, small business. Then they want to stay on and I get that, particularly if they have no earning capacity maybe outside of that business. They’re worried about being able to go and find another revenue stream, depending on what the kind of business it was. I’ve had people who, before being in a family business, there would be no ability to make the kind of money that they’re making because they’ve grown up in that business, that’s what they’re qualified to do. So that happens also with spouses.
I don’t think, generally, exes should be business owners. I would generally counsel my client against that. If you are going to stay a business owner, you need to have a partnership agreement, a shareholder’s agreement, whatever corporate structure your business has. You want to have something in writing as to how this is going to go, going forward.
Catherine Shana…: And that should be done before the divorce agreement is signed.
Elizabeth Billi…: Yes, or [inaudible]. So what I’ve done, I have some clients where they’ve stayed business partners in real estate. That’s a very common one. That’s probably the most common that I see because you can be partners in a real estate business on a rental property, but you don’t really have to deal with each other on a day-to-day basis. So in those cases, we will do a partnership agreement and it’s in conjunction with the property settlement agreement. It’s a separate document, but they’re all being signed at the same time because people don’t think about it and also people think, “Oh, we get along right now. So it’s going to be fine.”
Catherine Shana…: Or, “They promised me.” [crosstalk].
Elizabeth Billi…: Yes. “They promised me. We get along right now.” And that’s great and I always hope that that lasts, but it doesn’t often. And I had a guy, this was years ago, say, “Oh, my ex and I used to get along really well. And all of a sudden, now she’s giving me a hard time.” And I said, “Did you get a girlfriend?”
Catherine Shana…: Yeah, exactly.
Elizabeth Billi…: He said, “Yeah, how’d you know?” And I was like, “Oh.” So third parties come in. Maybe you get remarried. They don’t like that you’re still a business owner. What if someone wants to be bought out later on? How’s that going to look? What if someone dies, how does that look? I mean, there’s a lot of … One of my favorite phrases is, “Wife with peril.” There’s certain things in divorce cases that people want to do, but as lawyers, I have to say, “Whoa, let’s put on the brakes here and work through this.”
And I know you guys do the same thing. It’s, particularly, I’d say, with probably other people’s expenses, “I want to go buy this house,” and I’m like, “Well, let’s put on the brakes. Do you have the cashflow for that?” Mine is that sometimes, but it’s also like, “Whoa, let’s talk this through. It sounds really nice that you want to keep living in a marital residence with your wife until your last kid turns 18.” I have one of those right now, but what’s that going to look like?
Karen Chellew: Yeah. These are the things [crosstalk].
Elizabeth Billi…: [crosstalk] play out these scenarios.
Karen Chellew: Right?
Elizabeth Billi…: Yeah. There’s so many things. And I think, as divorce professionals, my clients and your clients, they all benefit from the horror stories and the missteps of our other clients.
Karen Chellew: Yeah.
Elizabeth Billi…: And so a lot of my advice is based on what I’ve seen other people do and it’s not worked.
Karen Chellew: Yeah.
Catherine Shana…: But there’s a ton of information and we can go on forever about [crosstalk]-
Elizabeth Billi…: Oh, my gosh. Yes.
Catherine Shana…: -but I’d like to put it out there to the viewers, if you don’t mind, Liz, is that, listen, there’s a lot of questions. If you have them, send them in. We’d love to do a followup podcast with [crosstalk]-
Elizabeth Billi…: Oh, that’d be great. Yeah.
Catherine Shana…: -to answer these questions because they’re really important and we certainly can’t handle it all in this half an hour, but at the end of the day, I think having the financial clarity, knowing what your options are, and stop listening to everybody that’s chirping in your ears, listen to your team of divorce professionals-
Karen Chellew: So important.
Catherine Shana…: -because that’s what they’re there for. And then you’ll make the right decision for you and your family.
Elizabeth Billi…: The podcast listeners can’t see my face, but I’m preaching, hands up because not every divorce is the same.
Catherine Shana…: [crosstalk].
Elizabeth Billi…: Your friend’s divorce is not your divorce. And please listen to the people that you are paying because we are not … I think people just are … they think we’re here to take them for a ride, but I know I’m not, I know you guys aren’t. And we have the knowledge and the expertise to help you. Please use it. I had a client say to me yesterday, “Well, I’m just going off of what I saw on TV.” I was like, “Well, that show is from California. So wrong.” And so please listen to your experts because-
Karen Chellew: Important.
Elizabeth Billi…: -you’re only going to be financially better off. And my thing I always preach is you want to get to that best post-divorce life. And the only way you can do that is setting yourself up for it and financial is a huge pillar of that.
Catherine Shana…: Yeah. Karen had to leave us to something, but-
Elizabeth Billi…: That’s right, yeah.
Catherine Shana…: So that’s why she logged off, but it’s really important. Have the clarity you need, ask the questions you need to ask. And you know what I love, Liz? Is, when clients come to us and get their financial portrait and then we get to align them with attorneys like you, they get to see that you’re there for the right purposes because you get to actually set up strategy with them. And this way, they know they’re paying you to do what you’re trained to do with that clarity, which is so important. So we really appreciate it.
Elizabeth Billi…: Thank you. Yeah.
Catherine Shana…: [crosstalk] with attorneys like you because [crosstalk].
Elizabeth Billi…: I really appreciate that. And I think there’s so many characters out there of divorce lawyers, but my goal has always been … I’m not here to take all your money. I’m not here to scorch the earth and I want to keep families in the best position they can. And having the tools to do that with you guys helps me have those tools, helps our clients have those tools. Everyone is [inaudible]. You can have a good divorce experience. That’s how you can do it, is setting yourself up and preparing yourself. And it’s hard to leave the emotions. You can be emotional. Let us take the emotion out of it for you and then help you make those decisions. And the only way you can make those decisions is knowing what you have and how to move forward. And having a strategy in the beginning is so important. [crosstalk].
Catherine Shana…: Yeah.
Elizabeth Billi…: And you only have that if you know what you got.
Catherine Shana…: Right, right. And it’s easier to keep track like that.
Elizabeth Billi…: Exactly.
Catherine Shana…: So we thank you for being with us today. And again, send in some questions. Liz would be happy to get on again with us to answer those, which is the best way to get the information that you need. We’ll have your information available for our viewers to contact you. And you’re in Pennsylvania.
Elizabeth Billi…: Yes.
Catherine Shana…: And are you in New Jersey also? Just Pennsylvania?
Elizabeth Billi…: I am barred in New Jersey. I don’t really do too much there. So I’m best with people in the suburban Philadelphia area, but I can answer any Pennsylvania questions, for sure. If you’re out of state and you need a divorce lawyer, I know a lot of great lawyers out there, as well. More than happy to connect you to people. I want people to have a good experience, so I like to do that connection if I can.
Catherine Shana…: Great.
Elizabeth Billi…: But yeah, any questions, I’d be happy to answer them. The more information, the better.
Catherine Shana…: Great. Thank you. Thank you, guys, for listening to us and we look forward to talk to you again soon. Bye.
Elizabeth Billi…: Thanks. Bye.