The process of going through a divorce is complicated enough but when you add business ownership into the mix it can become a whole lot more complex.
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 minimize the impact of the separation on the business.
When a business is owned by both or one of parties to the marriage
The impact of a divorce on these types of businesses often comes down to whether one party is operating the business or both are. 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 common questions that we see come up include if the person operating the business is telling the truth about the financial status of the business, what the business is worth and whether it is a saleable business.
What we see is that people can often have very inflated opinions of what their business is worth. Whilst it is not typically the case that the business will have to be sold, it’s true value will need to be determined to finalise a property settlement and assist when considering whether one party can afford to retain it. This usually depends on the nature of the business.
A simple approach to initially consider whether a business has any value often comes down to whether or not the business is more than just a one-man band. If you have numerous employees who can run the business in your absence without getting 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. Here is where arguments often lie because parties often have different ideas about what the business is worth and whether or not it could be sold.
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.
How divorce affects businesses with third parties
It is not uncommon that a husband and wife are in a partnership or corporate entity with siblings, parents or non-related parties. Often there are partnership agreements or shareholder agreements that prescribe how a party buys in and out of the business. For example, if you have three partners in a business partnership and partner A decides to leave, Partner A cannot sell their interest in the business to anybody else without first offering it to B and C. If B and C do not want to buy it then if A wants to sell it to someone else, both 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 Person A’s interest in the business, the Court looks at the shareholder agreement or the 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 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.
In our experience working as family lawyers, what we have also seen are circumstances where shareholders are expelled or their entitlements reduced if their partner starts proceedings in the Family Court. The reason for this is divorce settlements can take years and this can take a huge toll on the partner going through the divorce. This may mean their level of application to their role in the business can reduce significantly, but they still get paid their share of profits, which is not fair to the remaining partners who would need to carry the additional weight.
Also, as part of the financial disclosure process required for a property settlement, the third parties to the divorce, the remaining partners, could then 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 that is likely to affect everyone involved in the business (and the potential strain this may place on your relationships with them).
Business ownership and divorce can add additional complications to a property settlement. Your first steps should be to speak early to a specialist family lawyer and start the process of understanding what any of your business agreements specify and how that will impact on your divorce. Partners or shareholders in trading business should also consult their commercial lawyers to look at partnership agreement or shareholder agreements as a tool for minimising the impact of a separation of a business partner on the remaining partners.
Related: Working with business owners going through separation and divorce
Business ownership and 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 +61730079898 or secure a time by clicking here.
