Business owner divorces are said to be the hardest divorces to litigate. A corollary to that rule is that a business owner’s spouse, actually, are the most difficult kind of divorce to litigate.
Business owners are usually married to people who have no desire for the rollercoaster ride of entrepreneurship. When a business owner and their spouse divorce, the spouse finds themselves part-owner of a business they barely understand. The business owner’s spouse must accept a fair value for their marital stake in the business. Furthermore, a business owner’s spouse, most likely, must maintain themselves with profits from a business they have no control over.
This article details the steps that must be taken when spouse divorces a business owner in Illinois.
Discovery In The Divorce Of An Illinois Business Owner’s Spouse
The first step of any Illinois divorce is initiating discovery. You may be tempted to start by mediating but initiating discovery immediately will provoke the business owner to provide insufficient discovery that will give you great leverage (more on this later in the article).
There is not a giant database of that lists who owns everything, everything that each person owns, and how much everyone earns. That’s all a secret…even from your spouse. You are, however, allowed to ask your spouse for what they own and what they earn.
“[A] party may obtain by discovery full disclosure regarding any matter relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking disclosure or of any other party, including the existence, description, nature, custody, condition, and location of any documents or tangible things, and the identity and location of persons having knowledge of relevant facts.” Ill. Sup. Ct. R. 201(b)
Discovery in a divorce against a W2 employee is very strait forward. You ask for their W2s, their tax returns, some recent paystubs and then compare those documents against their bank accounts. If, God forbid, something is missing, you subpoena the third party (their employer or their accounts) to get a copy of the documentation.
Discovery for business owners is completely different. All the documents you are requesting are created by the business owner and there’s rarely a secondary source to immediately verify those documents. Business owners issue their own paychecks. Business owners can hold back dividends to themselves. Business owners control the assets of the business. Business owners even control the documents that their tax preparers use to prepare their tax returns.
Because of anticipation of discovery problems when representing a business owner’s spouse, discovery requests should go out immediately after the business owner has been served and has filed their appearance.
Despite these natural challenges to determining a business’s assets and income, Illinois courts will try their best to enforce the transfer of financial documents pursuant to discovery requests.
“The purposes of litigation are best served when each party knows as much about the controversy as is reasonably practicable.” Mistler v. Mancini, 111 Ill. App. 3d 228, 231 (Ill. App. Ct. 1982)
Initially, a request for a financial affidavit, issuance of standard marital interrogatories and a notice to produce is enough to keep everyone busy for the next few months. I will address how to deal with the business owner’s inevitably incomplete discovery responses later in the article. In the meantime, steps must be taken to maintain the business owner’s spouse while we wait on the initial discovery responses.
Maintaining The Business Owner’s Spouse During The Pendency Of The Divorce
Upon receiving discovery requests, a business owner may be tempted to begin manipulating his or her finances to minimize earnings and assets. Times will suddenly become very hard for this particular business and the family that owns it. The business owner may reflect that in refusing to pay expenses for the family that they previously had before the divorce was filed.
Even the threat of the business owner cutting off funds to the family should encourage the business owner’s spouse to immediately file a series of temporary motions.
Petition For Interim Attorney’s Fees In A Divorce From An Illinois Business Owner
A business owner’s spouse is preparing for the most expensive divorce litigation and will need the funds to properly enforce their rights against a business owner who controls all of the income and assets associated with the business. A petition for interim fees asks the court for both parties to provide for the lawyer’s expenses accrued and expected.
“The court from time to time, after due notice and hearing, and after considering the financial resources of the parties, may order any party to pay a reasonable amount for his own or the other party’s costs and attorney’s fees.” 750 ILCS 5/508(a)
“Interim attorney’s fees and costs may be awarded from the opposing party, in a pre-judgment dissolution proceeding in accordance with subsection (c-1) of Section 501” 750 ILCS 5/508(a)
“Except for good cause shown, a proceeding for (or relating to) interim attorney’s fees and costs in a pre-judgment dissolution proceeding shall be nonevidentiary and summary in nature.” 750 ILCS 5/501(c-1)
A summary hearing for fees is relatively simple. No evidence is presented beyond the financial affidavits and supporting documents. The court reviews financial affidavits and hears arguments from both sides.
“In assessing an interim [attorney’s fee] award, the court shall consider all relevant factors, as presented, that appear reasonable and necessary, including to the extent applicable:(A) the income and property of each party, including alleged marital property within the sole control of one party and alleged non-marital property within access to a party;(B) the needs of each party;(C) the realistic earning capacity of each party;(D) any impairment to present earning capacity of either party, including age and physical and emotional health;(E) the standard of living established during the marriage;(F) the degree of complexity of the issues, including allocation of parental responsibility, valuation or division (or both) of closely held businesses, and tax planning, as well as reasonable needs for expert investigations or expert witnesses, or both;(G) each party’s access to relevant information;(H) the amount of the payment or payments made or reasonably expected to be made to the attorney for the other party; and (I) any other factor that the court expressly finds to be just and equitable.” 750 ILCS 5/501(c-1)
An interim fee award lets the business owner know that every time they engage in any kind of litigation against you, they are going to pay their own attorneys…and yours. This should create a strong incentive towards settlement on their part.
Motion To Maintain The Status Quo In A Divorce With A Business Owner In Illinois
Other states like Florida (where I also practice) have an automatic court order that forces all parties to continue the financial status quo during the pendency of the divorce until further order of court. Illinois has no such automatic restrictions on either divorcing spouse’s economic behavior. In Illinois, if you want to make your spouse do something or prevent them from doing something, you must get an order.
A motion “is an application to the court for a ruling or an order in a pending case.” In re Marriage of Sutherland, 622 N.E.2d 105, 107 (Ill. App. Ct. 1993).
A motion to preserve the status quo is really a subtype of a motion. It is a preliminary injunction.
Preliminary injunctions “preserve[ ] the status quo until the merits of the case are decided.” Alms v. Peoria County Election Comm’n, 2022 IL App (4th) 220976, ¶ 25.
“Granting a preliminary injunction is used to prevent a threatened wrong or continuing injury and preserve the status quo with the least injury to the parties concerned.” Kalbfleisch v. Columbia Comm. Unit Sch. Dist, 396 Ill. App. 3d 1105, 1113 (Ill. App. Ct. 2009)
“The primary purpose of a preliminary injunction is to preserve the status quo until there can be a final hearing on the merits. In this regard, the term “status quo” has been consistently defined by the courts as ‘the last actual, peaceful, non-contested status which preceded the pending controversy.’ Generally, preservation is accomplished by keeping everything at rest.” In re Marriage of Sherwin, 463 NE 2d 755 – Ill: Appellate Court, 1st Dist. 1984 (citations omitted)
The argument should be that without resolving the merits of the case, knowing what the business is worth and what income it delivers to the owner, an Illinois divorce court should just order the business owner to continue to pay all the bills they paid in the past until further order of court.
Illinois courts don’t really like preliminary injunctions because by freezing everything in place, preliminary injunctions are adverse to resolving the fundamental problems before the court.
“Because injunctive relief is an exceptional remedy, it is not granted as a matter of course. Instead, courts must exercise extreme caution and grant such relief only after the plaintiff has established the existence of a certain and clearly ascertainable legal right, irreparable harm and an inadequate remedy at law.” In re Marriage of Sherwin, 463 NE 2d 755 – Ill: Appellate Court, 1st Dist. 1984
So, in order to get a preliminary injunction to preserve the status quo, you’re going to have to offer some specific proofs.
“In order to show entitlement to a preliminary injunction, the moving party bears the burden of showing (1) a certain and clearly ascertainable right in need of protection, (2) irreparable injury without injunctive relief, (3) an absence of adequate legal remedies, and (4) a likelihood of success on the merits.” In re Marriage of Rayfield, 221 Ill. App. 3d 763, 766 (1st Dist. 1991).
Work through each of these factors with the Illinois divorce court:
1) You have a clear and ascertainable right to food, shelter, electricity and health care. Your spouse should continue paying for them.
2) Without your spouse’s continued payments, you will be homeless, starving or subject to medical injury.
3) You cannot get adequate support at this time because you have no accurate knowledge of your spouse’s business income or assets.
4) Sooner or later, you will be awarded support which will be the approximate equivalent of the payments received via the order to preserve the status quo. But, in reality, this fourth requirement is a red herring when trying to maintain the status quo. If a requested order does “not alter the status quo, [a party is] not required to show he would likely prevail on the merits after full hearing” In re Marriage of Joerger, 581 NE 2d 1219 – Ill: Appellate Court, 4th Dist. 1991
An order to preserve the status quo will be a powerful incentive to the business owner to properly tender all their financials to reveal the assets and incomes of the business so the court can release any status quo requirements and, instead, set temporary support per the statute.
Motion For Temporary Support From A Business Owner In An Illinois Divorce
In 99% of business owner cases, the status quo order will be more generous than temporary support (unless the business owner was a massive cheapskate, which risk-friendly business owners rarely are).
Sooner or later a status quo order will terminate or, God forbid, not granted in the first place. Best practice is to have a motion for temporary support on file for when the court eventually does order that support.
“Either party may petition or move for
- Temporary maintenance or temporary support, accompanied by an affidavit , accompanied by an affidavit as to the factual basis for the relief requested.” 750 ILCS 501(a)(1)
Maintenance (formerly known as alimony) and child support are two separate equations.
“Maintenance…shall be calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income…[not to exceed] 40% of the combined net income of the parties.” 750 ILCS 5/503(b-1)(1)(A)
“The court shall compute the basic child support obligation by taking the following steps:(A) determine each parent’s monthly net income;(B) add the parents’ monthly net incomes together to determine the combined monthly net income of the parents;(C) select the corresponding appropriate amount from the schedule of basic child support obligations based on the parties’ combined monthly net income and number of children of the parties; and(D) calculate each parent’s percentage share of the basic child support obligation.” 750 ILCS 5/505(A)(1.5)
Both statutes reference “net income.”
For maintenance, “As used in this Section, “net income” has the meaning provided in Section 505 of this Act [the child support section], except maintenance payments in the pending proceedings shall not be included.” 750 ILCS 5/504(b-3.5)
Net income is subsequently defined as “As used in this Section, “net income” means gross income minus either the standardized tax amount calculated pursuant to subparagraph (C) of this paragraph.” 750 ILCS 505(a)(3)(B)
Business owners don’t have a gross income less standardized tax amount. Business owners have gross receipts less gross expenses.
“For purposes of calculating child support, net business income from the operation of a business means gross receipts minus ordinary and necessary expenses required to carry on the trade or business.” 750 ILCS 5/505(a)(3.1)
Of course, business owners try to minimize the gross receipts and maximize the necessary expenses. Illinois divorce courts can step in and disapprove of certain expenses.
“[A]ny business expenses determined either judicially or administratively to be inappropriate or excessive shall be excluded from the total of ordinary and necessary business expenses to be deducted in the determination of net business income from gross business income.” 750 ILCS 5/505(a)(3.1)
On a temporary basis, however, the court makes these profit determinations on summary basis.
“Issues concerning temporary maintenance or temporary support of a child entitled to support shall be dealt with on a summary basis based on allocated parenting time, financial affidavits, tax returns, pay stubs, banking statements, and other relevant documentation, except an evidentiary hearing may be held upon a showing of good cause.” 750 ILCS 5/501
So, an Illinois court will not be reviewing, for example, whether a massage billed to a business credit card is truly a “necessary expense”. Again, this is why a motion for a status quo is a much more attractive system of temporary relief.
Once some kind of temporary relief is granted, the business owner’s spouse should have the breathing room to do the real work in a divorce involving a business: valuing the business.
Valuing A Business When You Are The Business Owner’s Spouse
At this point, you’ll have some (definitely not all) of the financial documents related to your spouse’s business. In fact, the failure of your spouse to provide all of the documents is actually a strategic triumph for you. It allows you to skip multiple steps and ask the court to appoint a financial expert to value the business and determine the business’s income.
“The court may seek the advice of financial experts or other professionals, whether or not employed by the court on a regular basis. The advice given shall be in writing and made available by the court to counsel. Counsel may examine as a witness any professional consulted by the court designated as the court’s witness. Professional personnel consulted by the court are subject to subpoena for the purposes of discovery, trial, or both.” 750 ILCS 5/503(l)
A 503(l) expert is a court’s witness. This means they do not work for either party but, rather, they work for the court. A 503(l) witness can appear in court and explain that the business owner has not tendered sufficient requested evidence. A 503(l) expert’s demand for documents is far more persuasive than you trying to enforce compliance with discovery orders while the business owner spouse objects claiming the discovery request is irrelevant or overly burdensome.
A 503(l) is virtually guaranteed to get appointed because an opinion is required as to a business’s value. There is no other way to estimate the value of a business except via an expert’s opinion
You even need an expert’s opinion as to the business’s value if the business was started before the marriage and is, therefore, indivisible in the divorce. Any division of divisible marital assets must consider “the value of the property assigned to each spouse” 750 ILCS 5/503(d)(3). “Property assigned” includes the automatically assigned non-marital property.
“The value of the nonmarital assets is an important consideration in the apportionment of marital property, and the failure of a trial court to determine the value of substantial assets can justify reversal.” In re Marriage of Rosen, 126 Ill. App. 3d 766, 777 (1984)
At this time, you have the advantage. Before the report is issued and the business owner is stuck with that opinion (it won’t be the final opinion), the business owner should be willing to negotiate with you in the hopes that their final offer will be less than the marital share of the 503(l)’s business valuation. Business owners, in my experience, love to negotiate. Use this window of time to your advantage.Now that you are receiving temporary support and are waiting on the 503(l)’s report, you need to prepare for your business owner spouse’s eventual retort.
Preparing For The Business Owner’s Discounts Arguments
Upon receipt of the 503(l)’s business valuation report, the business owner will be incredulous as to how someone who doesn’t work in their business could come up with such a wrong-headed value.
The business owner is likely to have some very good reasons why the business valuator’s report is wrong. These reasons are usually based on “discounts” that the business valuator did not sufficiently apply.
The business owner will announce his own controlled expert who will gleefully point out grandiose discounts. (Note: do not worry about the business owner’s expert, you’ve already got a court’s expert. Who do you think the judge is listening to?)
The business owner’s testimony as to these discounts will be very powerful as the business owner has the greatest knowledge of their own business. Your duty, as the spouse of a business owner, is to remember contradictory things about those discounts that you heard over the years from your spouse.
Below are some discount arguments the business owner spouse can use and how you can counter those arguments.
Personal Goodwill
Personal Goodwill is the value the business person brings to the business. That value cannot be split in a divorce. Personal “goodwill is [not] subject to valuation, division or distribution as marital assets” In re Marriage of Zells, 143 Ill. 2d 251, 256 (1991)A business owner is likely to say “I’m the business. Without me. The business falls apart.” The business owner’s loyal employees are likely to testify to the same.
As the business owner’s spouse, you must have heard the business owner saying that the business is worth X or could be sold for Y. There is no way this never came up during any retirement planning.
More accurately, a business owner’s spouse can recall what the business owner did on vacation. Was the business owner constantly on the phone with employees throughout the vacation or did the business operate perfectly fine without the business owner there for a week or two.
Lack Of Marketability
Lack of Marketability reflects that there is not a stock exchange for small businesses. Not everyone can buy a business let alone operate it. A business owner is likely to say “this business may have value but there is no one to sell it to”.
Again, a business owner’s spouse will have heard complaints about competitors. Those competitors could buy the business.
Lack of Control/Minority Discount
A business that you cannot control, is not a business you can sell. A business owning spouse may complain that their partners keep them from making effective business decisions. Therefore, the business’s value should be discounted because they can’t really operate the business the way it should be.
A business owner’s spouse will surely have heard this complaint about the partners constraining the business owner’s true hopes and dreams for the business. More likely, the business owner’s spouse heard none of that because partners like and support each other…or they wouldn’t be partners.
Dependence On A Key Employee
Just as some businesses don’t work without the owner, some businesses don’t work without a special employee. A business owner may ask for a discount because these special employees may leave some day.
A business owner’s spouse can remark that the business owner never publicly worried about these key employees leaving while they were together.
Customer Concentration
Just like the fear of losing a key employee, a business may depend on just a few customers. A business owner may want a discount on the value of their business because of the extreme risk of a customer no longer purchasing from them.
A business owner’s spouse can recall that this so-called “extreme risk” was never discussed.
Negotiations Continue
The longer a business owner’s case goes on, the more leverage the business owner’s spouse has (so long as the business owner’s spouse is getting support).
The business owner will realize as time passes that business valuation is not an exact science and that the person who finally values the business, the judge, is not a business person.
Additonally, business owners usually are ordered to pay the fees of both parties as an advance on each parties estate. “[I]nterim awards…shall be deemed to have been advances from the parties’ marital estate.” 750 ILCS 5/501(c-1)(2). While, in theory, the attorney’s fees awarded to the business person’s spouse will just be deducted from their future awarded share of the business…it sure doesn’t feel that way.
Furthermore, there is one thing you can guarantee, the business owner wants to keep their business. Their business is their identity. Their business is the one way they know how to make money. They will buy you out! The only question is how much.
To ensure an offer, simply threaten to force the sale of the business to a third party immediately. An Illinois divorce court is allowed or order “appropriate temporary relief including, in the discretion of the court, ordering the purchase or sale of assets and requiring that a party or parties borrow funds in the appropriate circumstances.” 750 ILCS 5/501(a)(3)
A forced sale prejudgment is extremely unlikely but, as my mother always says “if you don’t ask you don’t get.”
“[S]ection 501 authorizes the sale of an asset prior to final dissolution, but that is appropriate only in extraordinary circumstances, where such a sale is required to otherwise maintain the status quo prior to final dissolution.” In re Marriage of Gabrys, 2023 IL App (1st) 221763
Business owners may want to enter into a payment plan for the buyout of the business. Insist on receiving the full statutory interest payment on any moneys owed as the business owner pays them out. Interest on these payments is mandatory. In re Marriage of Rozdolsky 2024 IL App (2d) 220423-U
“[J]udgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied” 735 ILCS 5/2- 1303(a)
9% is historically better than the stock market provides and certainly higher than the SBA loan the business owner could get to buy you out.
A Business’s Retained Earnings Are Also Yours
No business has ever had exploding profits during the business owner’s divorce. All earnings are suddenly necessary for reinvestment in the business. Especially if the business is a non-marital asset. These undistributed earnings are called “retained earnings”.
Earnings that are not distributed are legitimate at first blush. ““[R]etained earnings and profits of a subchapter S corporation are a corporate asset and remain the corporation’s property until severed from the other corporate assets and distributed as dividends. In re Marriage of Joynt, 874 NE 2d 916 – Ill: Appellate Court, 3rd Dist. 2007
If the retained earnings were distributed, they would be counted as income to the business owner for the purposes of support. So, if the business is non-marital, you should be arguing that the retained earnings be applied to the business owner’s income.
“[C]ourts should engage in a case-by-case, fact-specific analysis to determine whether retained earnings of a corporation should be imputed to the sole or majority shareholder for purposes of calculating child support.Relevant factors in this analysis include: (1) the extent of the obligor’s ownership share in the corporation, (2) the obligor’s ability to decide whether corporate earnings should be retained or distributed, (3) the corporation’s history of retained earnings and distributions, in comparison to post-divorce corporation activities, (4) whether the retained earnings are excessive, and (5) whether there is evidence that income is actually being manipulated…[H]eightened scrutiny is appropriate when the obligor has the power to control distributions, but this, in itself, is not dispositive of whether a subchapter S corporation’s retained earnings must be included in an obligor’s income when calculating child support.” In re Marriage of Moorthy and Arjuna, 29 NE 3d 604 – Ill: Appellate Court, 1st Dist., 5th Div. 2015
If the business is marital, you can ask the retained earnings stay retained and not be spent because you’re entitled to 50% of those earnings at the end of the case.
Either way, politely acknowledge that you just want what’s appropriate and you are not double-dipping.
“Commentators use the phrase “double dipping” to describe the seeming injustice that occurs when property is awarded to one spouse in an equitable distribution of marital assets and is then also considered as a source of income for purposes of imposing support obligations.” In re Marriage of Eberhardt, 387 Ill. App. 3d 226, 232 (Ill. App. Ct. 2008) (citation omitted)
Also, remind the court that the business owner’s attempt to keep the retained earnings and not pay support on those earnings is its own kind of double-dipping.
The Ultimate Threat To A Business Owner: Receivership
If the business owner is hiding money or suppressing earnings to get a lower business valuation, the business owner’s spouse can ask to appoint a receiver.
“A receiver is an indifferent person between the parties appointed by the court to collect and receive the rents, issues, and profits of land, or the produce ot personal estate, or other things which it does not seem reasonable to the court that either party should do; or where a party is incompetent to do so, as In the case of an infant” Black’s Law Dictionary (11th ed. 2019)
Appointing a receiver to operate the business is an extreme step but it may be necessary.
“A court of equity has the power to appoint a receiver of a corporation only when conditions of dissension, dispute, fraud or mismanagement exist, which make it impossible for the business to continue or to preserve its assets. It is well recognized that the appointment of a receiver is an extraordinary and drastic remedy to be exercised with great caution.” Poulakidas v. Charalidis, 68 Ill. App. 3d 610, 614 (Ill. App. Ct. 1979) (citations and quotations omitted)
Finally, the only qualified receivers to operate the business while the divorce is pending are probably the business owner’s competitors. This would really add insult to injury.
Final Thoughts On Litigating A Divorce On Behalf Of A Business Owner’s Spouse
Typically, the business owner’s spouse is the most vulnerable person possible in a divorce. The business owner’s spouse has no idea how the business works, what it’s worth, where the money comes from or where the money goes.
However, if a business owner’s spouse follows my above steps, the business owner will slowly become the vulnerable party as they have no basis to prove that their business is worth nothing without also incurring the wrath of the court’s expert, the judge and maybe even the receiver.
If you are a business owner’s spouse and your divorce lawyer does not have an elaborate and disciplined strategy as I’ve written above your divorce lawyer is simply going through the motions and hoping for the best.
Contact my Chicago, Illinois law office to speak with an experienced Illinois divorce attorney who has litigated business owner divorces on behalf of the business owner AND on behalf of their spouse.
Russell Knight is a divorce attorney licensed in Illinois since 2006 and Florida since 2018. Russell Knight focuses on high-conflict, complex divorces involving complicated assets such as closely held corporations.
