This page explores what to know about the impacts where there is a separation or divorce and business partners are also in the mix. This includes circumstances where one or both parties to the relationship have an interest in a business as well as how separation and divorce can affect third party business partners or shareholders.
People who own businesses and are impacted by divorce typically fall into two categories.
There are businesses that are owned by one of or both of the parties to the marriage, with no third parties involved. Or in other cases, the business might be owned by one of or both of the parties to the marriage but they have third parties, often extended family, as partners or fellow directors in the business.
In this article we take a look at the impact of divorce on these two different business situations and explore what can happen if you own a business and if any of the owners were to go through divorce. We also explore some options to minimise the impact of the separation on the business.
Divorce and Business Partners | Separating When a Business Is Owned by One or Both People
The impact of a divorce on these types of businesses often comes down to whether one or both people are operating the business. If both parties are involved in the day to day running of the business then they have a greater understanding of how the business is trading. However it is not uncommon for one party to not be involved in the hands-on operation of the business and that party needing to rely on the other to keep them informed.
In these instances it is common for there to be doubts about whether the person operating the business is being truthful about the financial status of the business. Information such as what the business is worth and whether it is a saleable business may not be immediately available to the person not directly involved.
People can often have very inflated opinions of what a business is worth. Whilst it is not typically the case that a business will have to be sold, its true and accurate market value will need to be ascertained to finalise a property settlement. This is also important in determining whether one party can afford to retain it.
A simple approach to initially consider whether a business has any saleable value often comes down to whether or not the business is more than just a one-man band, or is heavily dependent on one or both people.
If you have employees who run the business in your absence without your input, then it is probably a saleable business. Whereas, if it is just one person working and there are no other employees, it is far less likely that the business will be saleable.
This is where arguments arise because both sides often have different ideas about what the business may be worth. They also differ in opinion about whether it could be sold as a going concern, without their involvement.
For more information about business valuations, visit the page Separation, Divorce and Business Valuation Truths.
This is when it is essential to involve an independent third-party to assess the business. This is usually an accountant who has specific expertise in valuation of businesses for family law purposes. This will ensure that all parties have a good understanding of the true value of the business at that point in time.
The issue about accountability and accuracy of financial records and disclosure is common. There are certain industries where cash transactions occur that might not make the books. For example, there may be one set of books for the tax man and one set of books which include cash sales, however this is becoming less common in most industries in today’s cashless society.
Divorce and Business Partners | Businesses with Third Parties
It is not uncommon that a husband and wife are in a partnership or corporate entity with siblings, parents or unrelated parties.
Often there are partnership agreements or shareholder agreements that prescribe how people can buy in or out of the business. Let’s use an example of three partners in a business partnership to illustrate.
Partner A decides to leave however the shareholder agreement states they cannot sell their interest in the business to anyone external, without first offering it to Partner B and C.
If Partner B and C do not want to buy that share, then if Partner A wants to sell it to someone else, both Partner B and C would have to approve of it. Otherwise the sale will not be able to proceed.
So, when a Court is placing a value on Partner A’s interest in the business, the Court looks at the Shareholder / Partnership Agreement because there may be a formula in those documents that calculates the value that is placed upon a share in the business.
The agreement might also prescribe a time frame for payment. So, let’s say Partner A offers the share to Partners B and C, and the agreement prescribes that it is valued at the average of three years trading figures divided by three. It may then prescribe that Partner A can only expect to be paid in instalments over a defined period.
It might be that Partner A’s interest is worth $120,000 but Partner A can only get that value out by Partner B and C paying him $40,000 a year for three years. The complication here is that $120,000 in your hand today is not worth the same as $120,000 payable to you over three years without interest.
As part of the financial disclosure process required for a property settlement, the third parties to the divorce, the remaining partners, can be subject to providing all of their financial data for their business to a firm of forensic accountants. The forensic accountants will go through everything for the duration of the settlement process to put a value on Partners A’s interest in the business.
The level of disruption to business is immense. It can put a hold on any plans for the remaining partners’ personal financial decisions and for the business. So, it is not just about the costs of your divorce, it’s also about the hidden costs of your divorce to your other partners. That is, being aware of what is likely to affect everyone involved in the business as well as the potential strain this can place on your relationships with them.
Divorce and Business Partners: What Else To Know
In our experience working with business owners, we have seen circumstances where shareholders have been expelled or their entitlements reduced as a result of orders made, if their former partner starts proceedings in the Family Court.
If you are a partner or shareholder in a trading business you should consult your commercial lawyer to look at getting a comprehensive partnership agreement or shareholder agreement in place. It can be a helpful tool for minimising the impact of a separation of a business partner, the other partners and the business itself.
The reason for this significant action is because of the awareness that divorce settlements can take years to finalise and that this can take a huge toll on the partner going through the divorce.
Sometimes this transpires because of their reduced degree of application to their role in the business. However, in these circumstances they still get paid their share of profits, which may not be fair to the remaining partners who would need to carry the additional workload.
There is no doubt that divorce and business partnerships add additional complications to a property settlement. To realise the best outcomes, your first steps should include speaking to a specialist family lawyer early. Get started on the process of understanding what any of your business agreements specify and how that will impact on your separation or divorce.
Related Topics: What Happens To A Business in Divorce?
Phillips Family Law is an award winning Family Law practice serving clients across Australia and abroad. Regardless of where you are in your decision making process, we can make you aware of your options. To discuss your situation confidentially phone (07) 3007 9898 or secure a time by clicking here.
Disclaimer: The content on this page provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.