Post Divorce Business Sale Sharing, Reality Check

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KW2020
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Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

Practice (medical) was valued at $500K in 2015/2016 for purposes of divorce. Fast forward appreciation congruent with the broader stock market and the current equivalent value would $1M (I would have happily accepted $900K to sell).

I have received an letter of intent for $1.85 for an installment sale of $1.4M now, and the reminder paid over 5 years. IMO this offer represents 12X EBITDA. Instead of negotiating for more, I asked if they could pay a portion directly to my ex-spouse (ES) and asked if they could wait, and move installment payments from year 2 to 6, to years 3 through 7. They were in conference when I 'chocked on my emotions' making these inquiries, rather than saying "I would need to consider their offer." I am sure they had a good laugh.

Note: I wanted a year with no income so I could do a Roth Conversion, as I am 35% taxable, 65% tax deferred, with very little ($25K) in tax advantaged (HSA/Roth)

I think that paying my ES a portion of the difference between the 1M and the 1.85M feels fair, and retrospectively reasonable. The 2015/2016 valuation was an earnest evaluation at 6 x EBITDA, the industry standard. The unexpected growth in practice value over the past 5 years has not been supported by the ES. I am feeling that a division of selling price over $1M should be 75/25%, with 25% going to the ES. Over the past few days this feels fair, but obviously I am ambivalent.

Thus, if $1.4 is paid out at closing, then 25% of $400K, or $100K can be paid to ES at closing. When the remainder ($450K) is paid out in years 3 through 7 ES can be paid 25% of $90K, or $22.5K, each year. Similarly, ES can be paid 25% of the interest on the remaining proceeds.

My first thought was just pay ES $150K consider it OK. My ES is not particularly interested in finances, and I suspect no matter what I do my ES will feel cheated.

I know that on one hand, many would argue I am foolish to pay my moderately amicable ES anything.

But, someone in the ES camp might argue that I should pay 50%, same as original intent. Duh!
I would retort that nobody would expect or anticipate an earnest current valuation at 12 x EBITDA! This is an exceptional opportunity, possible with a window. I have gotten lucky. Hell, if it was THAT easy, I would have sold in 2016 and just been done with it all then.

And, I would argue that the sustained performance of the practice has come at a great personal opportunity cost, and a cost to my personal health, which the ES has not participated in or supported over those 5 years (7 years actually, when we separated).

BTW, with a NW of 4M we did a DIY divorce and it cost us less than $3,000.

Reactions? Influence? Support?

NW
EdNorton
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by EdNorton »

Was your divorce final? Are you doing this out of the goodness of your heart. If so, you got a screw loose. Just my opinion. :sharebeer
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Luckywon
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Luckywon »

EdNorton wrote: Sun Feb 23, 2020 12:47 pm Was your divorce final? Are you doing this out of the goodness of your heart. If so, you got a screw loose. Just my opinion. :sharebeer
+1

Why tell ES the details of the sale, or even that the business was sold?
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

I thank you for the comments. Those are typical of the few I have received.

Divorce was final 5 years ago. (Ah, but it seems like yesterday...).

ES is still part of the extended family; ES has no other 'family' of their own (in the picture).
While I still care about ES, just didn't want to be married to ES any more. Some blame me for leaving ES alone in life :) Holidays (extended family) are bad enough already, don't want to pour gasoline onto the mix. And I want to sleep soundly in my grave and before.

Married for 35 years, two kids whom we mutually care about.
One dysfunctional (w/3 grand kids) one super successful.
Daughter requires emotional, and financial support.
Son has similar medical practice in another state, so business has always been a topic of discussion. I am 40% partner in his entity (purchased 12m ago) and he is about to buy me out of that. Son has intricate knowledge of my business (to a lessor extent, extended family and mutual friends have intricate knowledge as well). I have never been a private person.

Sale of my business is something ES has hoped and wanted on my behalf.
But this offer is exceptional.

Putting myself (or yourself) into skeptical ES shoes; wouldn't you feel cheated since I (with an outside valuation) came up with the settlement offer, including the $500K valuation?

KW
Luckywon
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Luckywon »

KneadingWater wrote: Sun Feb 23, 2020 1:37 pm
Putting myself (or yourself) into skeptical ES shoes; wouldn't you feel cheated since I (with an outside valuation) came up with the settlement offer, including the $500K valuation?

KW
Not if I didn't know what the business was sold for. Perhaps have the buyer sign a NDA not to disclose the sale price. It's not warm and fuzzy but at this point, it's your business and ES is not entitled to know the details, especially if these may stir up trouble.
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Sandtrap
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Sandtrap »

1
Condolences
2
Congratulations on remaining level
And, with a sense of personal integrity
Thus, no regrets
And, minimal damage all around
3
Complete what you have proposed, ASAP.
Put things behind you.
Leave nothing unfinished.
Move on.

j :happy
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HomeStretch
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by HomeStretch »

Was the $500k valuation 5 years ago at the time of divorce reasonable and fair? It’s not surprising given your hard work and market conditions that your business value has increased significantly since then. If the value had instead declined through no fault of your own, would you feel cheated and expect ex-spouse (ES) to return some of the divorce settlement to you?

First, none of your friends or family need to know what the business sells for. If you do share the information, you might get resentment from ES over your good fortune especially as you initiated divorce.

Second, is the ES (and mother of your children) financially secure now and for retirement? Many women are financially disadvantaged after a divorce. If this is more money than you need and ES is not set financially or helped with the early success of your business (including caring for kids to allow you to build the business) or you feel $500k valuation was flawed, IMO your plan to share the good fortune with her is generous, kind and appropriate.

If you feel sharing with her will not be appreciated or cause dissension, would providing some sum in trust for each of your kids be a good substitute?
Last edited by HomeStretch on Sun Feb 23, 2020 3:34 pm, edited 1 time in total.
Flora
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Flora »

ES has zero percent current ownership in your medical practice today and you want the buyers to give her $100,000 of your gross proceeds.

It sounds like essentially you are gifting her $100,000 thus you will need to 1) file a gift tax return to report this gift as well as 2) include the $100k as part of your gross proceeds on the business sale and pay income tax on the gain.

So you are more generous than $100k since the gift will cost you $100k plus any income tax on the prorated gain portion of the $100k.
ARoseByAnyOtherName
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by ARoseByAnyOtherName »

KneadingWater wrote: Sun Feb 23, 2020 1:37 pm I thank you for the comments. Those are typical of the few I have received.

Divorce was final 5 years ago. (Ah, but it seems like yesterday...).

ES is still part of the extended family; ES has no other 'family' of their own (in the picture).
While I still care about ES, just didn't want to be married to ES any more. Some blame me for leaving ES alone in life :) Holidays (extended family) are bad enough already, don't want to pour gasoline onto the mix. And I want to sleep soundly in my grave and before.

Married for 35 years, two kids whom we mutually care about.
One dysfunctional (w/3 grand kids) one super successful.
Daughter requires emotional, and financial support.
Son has similar medical practice in another state, so business has always been a topic of discussion. I am 40% partner in his entity (purchased 12m ago) and he is about to buy me out of that. Son has intricate knowledge of my business (to a lessor extent, extended family and mutual friends have intricate knowledge as well). I have never been a private person.

Sale of my business is something ES has hoped and wanted on my behalf.
But this offer is exceptional.

Putting myself (or yourself) into skeptical ES shoes; wouldn't you feel cheated since I (with an outside valuation) came up with the settlement offer, including the $500K valuation?

KW
Sometimes in life we willingly choose a different path in service of a greater (or different, or better, or...) good. You position is admirable.
fru-gal
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by fru-gal »

HomeStretch wrote: Sun Feb 23, 2020 2:00 pm
Second, is the ES (and mother of your children) financially secure now and for retirement? Many women are financially disadvantaged after a divorce. If this is more money than you need and ES is not set financially or helped with the early success of your business (including caring for kids to allow you to build the business), IMO your plan to share the good fortune with her is generous and kind.
This is what I would do. 35 years and you left, she must be an emotional wreck. I'm sure she thought you would be spending your old age together. At least she should be financially comfortable and have enough to cover any elderly care expenses.
123
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by 123 »

If you own the business 100% than any gain on the business is all taxable to you. Any proceeds paid by the purchaser would count as proceeds to you even if you decide some portion goes to ES. Whatever the ES might receive is simply a gift from you, subject to filing of gift tax form if over the annual limit. Sounds like you're trying to mix a personal agenda with a business agenda, that usually complicates things and causes problems.
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randomguy
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by randomguy »

KneadingWater wrote: Sun Feb 23, 2020 12:38 pm
But, someone in the ES camp might argue that I should pay 50%, same as original intent. Duh!

NW
If you sold the business for 250k, would you expect a check for 125k since it was overvalued at the time of divorce? If she thought you were ripping her off, she should have held out for more money. Maybe her legal counsel failed her (i.e. not sure what your getting for 3k between 2 people) but again that was her choice. At some point you have to stop infantilizing people and let them live their lives.

If you want to give away money, nothing wrong with that. But I would worry more about you dysfuntional daughter than an ex. One is your responsibility. The other isn't.
MP173
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by MP173 »

I have no opinion on whether or not you should make a settlement with ES....except would this possibly open up the divorce settlement to review? Could this extra settlement end up costing you much more, particularly since it was a DIY one?

Ed
HomeStretch
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by HomeStretch »

KneadingWater wrote: Sun Feb 23, 2020 12:38 pm But, someone in the ES camp might argue that I should pay 50%, same as original intent. Duh!
Expecting you to pay ES 50% is unfair to you. The higher valuation is, in part, due to your work, the risk you took and the capital tied up in the business over the last 5 years. If ES invested her $500k in the S&P 500 5 years she would have significantly more than $500k today as the S&P is up ~61% excluding dividends over that period.

Consider not committing to ES that you will give her a fixed $ amount or % until you know what your net proceeds after taxes will be. You also have to collect on future installments and tax laws/rates can change. Also take into account any proceeds you want to share with your children.
Dottie57
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Dottie57 »

I think anything you can do for ES beyond the divorce earns you a gold star in any heaven that exists.
Good Listener
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Good Listener »

What if you're sold it for a hundred thousand or couldn't get anything for it? Would ES return anything to you in your estimation?
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

Thank you all for the spirited comments. All valid.

The seller’s council asserted the payment could be split pre tax. Ill chat with attorney on Tuesday.

KW
999
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by 999 »

If I were in your shoes and selling a business for 12 times EBITDA, I would concentrate on the price, payment and maybe tax treatment of the deal and not overly complicate the buyer with your old wives issues. Get the deal done and then if you want to help her out you can.

You likely are selling the business for a fair price and it was valued at a fair price 5 years ago, but you have grown it.

I know this website is supposed to be anonymous but you have laid out a lot of specific info, implying that the current sale may be over valued and the valuation done your divorce (bargain divorce I might add, was the valuation a bargain also) may have been undervalued.

Concentrate on closing the deal, then do what you thinks fair personally.
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by LukeHeinz57 »

You've gotten useful advice and I respect whatever path you would choose. I just wanted to echo the concern about all of the information you shared here that could be used by the potential buyers as leverage. Deleting the thread at this point now that you've gotten the feedback you sought would be wise in my opinion...
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MrsBDG
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by MrsBDG »

I commend you for checking yourself and wanting to do the right thing, that shows character. What is the right thing? I'm sure we can all come up with different ideas. I like the idea of keeping things copacetic with your ES.

What's her financial situation? Is she ok? Is she supporting the daughter financially or just emotionally? Would setting up a trust for the daughter and perhaps having ES administer it be a good thing? Is ES good with money? If ES is financially responsible and capable, then having her own funds to support herself for life is also good for your kids.

Again, I commend you on your efforts to keep things civilized, this truly is what's best for your kids.
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

Mrs BDG

ES is well off, but past 5 years have been likely better for me. ES provides most emotional support for daughter, both of us financial.

Thanks.

Ps
How do i delete a thread? Lol
CFOKevin
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by CFOKevin »

And focus on getting to your diligence completed along with your Purchase Agreement.

A jittery stock market can cause havoc with deals under Letters of Intent. Don't discuss what you may do for your ES with anyone except your attorney and tax advisor until the deal closes. That should give you time to decide what you feel is best.

Good Luck,

Kevin
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Tamarind
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Tamarind »

Since it seems this is not covered by your divorce agreement, you can make your ex-spouse a gift of any amount that you would like.
There's no metric that makes objective sense for determining an amount. If it feels fair to you, that's all that matters. Nothing wrong with generosity. Just be clear that this is a purely voluntary gift and file any needed forms.

I would also suggest that you not discuss the reason for your request with your buyers in future, nor ask them to make any payments to people who don't own the business. That is not appropriate. Seems to me also to weaken your bargaining position to overshare, regardless of whether you want the payments structured for your own convenience or for something else. What you gift to your ex is none of their business, and you should not ask them to make a payment on your behalf to avoid gift reporting.

Get these two things separate in your mind!
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Monster99
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Monster99 »

KneadingWater wrote: Mon Feb 24, 2020 10:54 pm Mrs BDG

ES is well off, but past 5 years have been likely better for me. ES provides most emotional support for daughter, both of us financial.

Thanks.

Ps
How do i delete a thread? Lol
PM one of the moderators - they may be able to delete the thread....
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

Tamarind wrote: Tue Feb 25, 2020 7:27 am Since it seems this is not covered by your divorce agreement, you can make your ex-spouse a gift of any amount that you would like.
Other than there would be tax savings (provided that can be done legitimately) for that share of the proceeds to go to the ES. If that can't be done easily and legitimately, then yes, a gift would be easier.

KW
RubyTuesday
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by RubyTuesday »

ES portion of your practice, if invested in S&P 500 with dividends reinvested has grown almost 80%. Your business was higher risk, required your personal effort and risk, and fortunately its value grew faster than S&P.

I’m neither tax or legal professional, but can’t see how this would be treated as anything other than a gift.

So you pay tax on entire gain, then gift ES from after tax proceeds. You are being very generous or feeling very guilty or both.
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

RubyTuesday wrote: Tue Feb 25, 2020 10:29 am can’t see how this would be treated as anything other than a gift.
I agree, but if the buyers legal team feels they can do it; and my attorney finds not objections, it would be a tax savings as ES would be in a lower bracket. ES would be 15%, rather than 20 + 3.8 NIIT. So, ES would get a bigger gift.
RubyTuesday wrote: Tue Feb 25, 2020 10:29 am You are being very generous or feeling very guilty or both.
Both, honestly. It is just money, and I was only looking for the 1st $1M. With that, I have reached my number, and I won't be able to spend it all. Even sharing, I can still buy a bigger boat. :)
Luckywon
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Luckywon »

OP, I have a single friend, if interested PM me :sharebeer
Impromptu
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Impromptu »

To clarify for myself, when you divided your assets at divorce your goal was to make an honest and equitable 50/50 split of your assets. Your portion of that 50/50 split included the business, which was honestly valued at $500,000. Her portion of the 50/50 split may have had $500,000 more cash or house or other assets because of this. So the the increase in value of the business over the last 5 years should be yours. If she had invested her extra $500,000 in the stock market and sold it today, would you expect 50% of the profit? At the point in time of divorce it was an honest and equitable division.

But do not go and boast about it to others. You never know how it will be taken, to whom it will get around to, or how it will be distorted once it does get around.
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cutterinnj
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by cutterinnj »

I am (very) recently divorced, also with a medical practice

As part of the settlement, I paid my ES what we determined to be 1/2 the value of the practice (in cash) and the marital separation agreement (MSA) specifies that she has no further claim against my practice. (Why she would have any claim or entitlement to my practice without having gone to medical school, been with me through school or residency, is another question entirely, but I digress...)

This should be specified in your MSA. I can’t imagine you owe your ES anything. Sell your practice, take the money, and have a wonderful retirement.
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KW2020
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by KW2020 »

Update/closure.
Sold....gonna want to write that check and then move forward feeling that life is a bit more fair.

KW
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Broken Man 1999 »

Good for you!

I think some posters didn't quite understand that it was your desire to be generous outside of the divorce settlement.

No matter what, she is the mother of the children.

A lot of people emerge bitter from divorces, and certainly wouldn't offer such a gift.

Based on your comments I think your gift will give you as much pleasure as ES receiving it.

Unlike some, it seems you have enough. It is a wonderful thing to know about yourself.

Broken Man 1999
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Ependytis
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by Ependytis »

Divorce is a business. Once you’ve settled it’s over. I think it’s fine overtime if you want to be generous to create goodwill. However handing over a lump sum might create problems as another poster mentioned. A lump sum gift will only have a temporary affect versus providing money overtime.
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Re: Post Divorce Business Sale Sharing, Reality Check

Post by BuddyJet »

KW2020 wrote: Fri Jul 10, 2020 4:43 am Update/closure.
Sold....gonna want to write that check and then move forward feeling that life is a bit more fair.

KW
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