Discussion:
Paraphrase the below paper:
Attn.: John Sanderson
Sanderson Wealth Management, LLC (SWM)
Re: C. Michael Badland divorce, ramifications
Mike has informed us he has just started divorce proceedings with his estranged wife, Jodie, after 18 years of marriage. As you know, Mike is a CPA and attorney, and Jodie is a CPA. Mike was recently made a partner in SWM, and owns 5%, valued in the partner agreement at $250,000, less his purchase debt due this date of $150,000.
The partnership agreement specifies the specific amount an interest can be repurchased for adverse reasons (like divorce) at $.60 on the dollar. Such agreement also limits the voluntary disclosure of financial records, including tax returns and compensation of partners. If such a valuation is successful, the partnership interest might have no value for divorce matters as the (($250,000 * .6) - $150,000) nets to zero. Such a valuation could be part of divorce proceedings.
Mike and Jodie have agreed to use mediation to settle their divorce, and so far Mike presents they are proceeding amicably. If mediation fails, traditional divorce litigation would be ordered, with the associated rights of discovery and valuation of SWM and Mike's minority interest.
Both parties know and understand the costs and benefits of traditional litigation. Both of them have had traditional divorces before, so they appreciate the risks and costs.
Mike would prefer mediation to litigation, because the partnership agreement offers a value for his ownership in SWM. Jodie would have to provide evidence of other value she won't be able to gather for mediation. While she would have access to their income tax returns, SWM financials would likely be off limits. Mike could offer Jodie excerpt from the agreement that spell out the repurchase language and valuation, so that the mediator could see support for the value.
Keep in mind you will not be required to take on any other partner, and the repurchase agreement (as prepared by Dewey, Cheatem and Howe, attorneys, PLLC, is valid as to purpose and discount valuation.
Mike previously drew salary of $175,000 per year. His draws as a partner are $250,000 per year, but he makes $50,000 per year payments for his initial equity. Mediation will not likely attempt to value his education as a JD/CPA, since his age (51) does not lend itself to a future earnings valuation of education. His income is established for alimony and other purposes.
We may want to consider encouraging ‘shadow counsel' to assist Mike in preparing for mediation. As long as no other attorneys are part of the process, keeping SWM out of things is much more likely.
If divorce litigation is needed, Mike will likely be required to pay for both attorneys, and CPA experts for valuation of his income/partnership interest/other assets, including retirement. Such costs could easily approach $100,000. Asking Mike to pay for that, in addition to temporary maintenance and other costs, may suggest that assistance from SWM may be in order.
Mike and Jodie do not have a prenuptial agreement, so mediation is likely the easiest, least expensive approach. It might be prudent to ask Mike if he has the resources to proceed, or if Jodie does. The firm is much better off if he can successfully mediate, and may find it financially beneficial to assist him in doing so.