Separation, Divorce and Business Ownership

If you are in business with someone separating from their partner or spouse, this page will also be beneficial for you – Separation, Divorce and Business Partners: What To Know

As you may be aware, when a de facto or married couple separate, within a certain timeframe there must be a division of assets which is known as the property settlement process. Where there are business interests, trusts and inheritances, these must also be taken into account with property, cash, superannuation as well as anything else considered the property of one or both parties to the relationship. While we’ve explored what’s involved in the property settlement process elsewhere including this page about how trusts are treated and this page about inheritances, here we share our family law insights that are specific to separation, divorce and business ownership.

In Australia, the end of a de facto relationship is treated the same as the end of a marriage, in respect  the requirement of a property settlement. So, where you see the word divorce used throughout this page, consider the information provided to be applicable for de facto relationships as well.

How Are Business Assets Divided in Divorce?

One of the first steps in the property settlement process is the need for both people to provide what’s known as ‘financial disclosure’. This is where both parties to the relationship are required by law to disclose all of their financial information, including business interests. 

While the financial disclosure process has been unpacked in detail here, in summary this process requires a full and frank disclosure of all assets owned before the commencement of the relationship, including what has been acquired during the relationship – either solely or jointly – and also takes into account the contributions, both financial and non-financial, made by each person during the relationship.

Specific to business owners, a valuation of any business interest is to be undertaken. This is regardless of whether one or both parties have business interests and regardless of whether one or both parties are involved in the same business. Where there are doubts as to the accuracy of the business’ valuation, a forensic accountant may be brought in to verify the original valuation.

Once we have the full picture, we can then provide our clients with an estimated range of what the property settlement outcome will be, which is expressed as a percentage. For example, between 45-55%. No family lawyer can ever provide an exact percentage, due to the discretionary nature of how a settlement is determined. For example, how a Judge may rule if your matter ever were to end up in Court, is never guaranteed. Similarly, if an agreement is reached without the involvement of the Court the people involved typically negotiate an outcome within that framework.  

Ultimately, and regardless of how the overall property pool is split between you, whether business assets need to be divided at all, will be dependent on whether the other person’s entitlement can be funded in another way.

Can You Lose Your Business in a Divorce?

The short answer is yes, it is possible. While there are asset protection mechanisms available to minimise risks like these, the reality is that your business forms part of the property pool and may need to be sold to pay the other person their entitlement.

If there are insufficient funds to fulfil the terms of the property settlement agreement (or Court decision), then selling the business or selling off its assets may be required. However there are many other options that can often be negotiated to reduce the risk of this. 

Can I Sell My Business Before Divorce?

You can sell your business at any time however that does not mean your former partner or spouse will not be entitled to any of the proceeds of the sale. It is always wise to consult with your accountant and your family lawyer if you are separating and considering selling prior to taking steps to do so. 

Are You the Advantaged Party, Disadvantaged Party or Neither?

From our years of experience in assisting people through their separation and divorce with businesses, we often, but not always, see one party who could be considered ‘the advantaged party’ and the other ‘the disadvantaged party’. Even in circumstances where both parties to the relationship have been directors in a business, often one person has more insight and clarity about the finances of the business and how it is run day to day. 

The disadvantaged party is so because, in addition to the significant emotional load that comes with separation, they find themselves having to get up to speed about the operations and profitability of the business (or businesses), which can take considerable time. And, if there is reluctance on the advantaged party’s side to be forthcoming with information, this adds additional time and stress. This is especially common where one party to the relationship has had the more significant relationship with the couples &/or business’ accountant.  

In Australia, because the property settlement process can begin any time from the date of separation, the pressure to pull all of the financial information together and get your head around it all quickly, is real. Additional issues can arise later down the track, if early legal advice is not sought.