Divorcing a spouse is emotionally draining but it can also be financially stressful, especially if you own a business together. Not only does running a business become more challenging, it can also affect any partners, shareholders, and the value of the business.
You and your former partner have an obligation to disclose your financial documents to each other. This includes business records, financial statements, BAS, bank records, and tax documentation. These documents are compiled and then given to each spouse. It's also worth remembering that all business interests (sole trader, partnership, or company) are considered as "property" and, therefore, must be attributed a value (even if that value is nil).
Needless to say, when a family business is involved in a marriage breakdown, things can get complicated. Having the right information, however, can protect yourself and your company. Here's a brief guide to what happens to a family business after divorce.
One of the most important steps in a divorce proceeding is the property settlement. During the property settlement, assets shared between the couple are assessed to determine how they can be divided in a fair manner.
For most couples, determining what is included in the asset pool is simple since it only involves a few things such as a family home, money in bank accounts, cars, or jewellery. However, when a family business is involved, it can be difficult to work out the current value of the business and what its potential future profitability is.
Until you and your former spouse can agree upon a specific value of the family business, it is safe to assume that negotiations will be difficult and that it will take longer to determine a fair settlement.
How is a business valued?
Determining the value of a business is different from valuing it for the purpose of being sold. In a property settlement, the estimation depends on the value to the owner. Simply put, what benefits will the owner receive if they retained their interest in the company?
All businesses are different so there's no one method to value a business. There are several methods valuers use and they choose the one that suits that business the best.
Sole trader businesses
A sole trader business structure is the simplest business structure. As a sole trader, an individual is legally responsible for all aspects of the business, including debts and losses. In this type of structure, the business usually remains with the sole trader who possesses the skill and training.
The value of a sole trader business depends almost entirely on the reputation of a person. A modest value is given to such a business interest as a "value to the owner".
As mentioned earlier, books and records of your business need to be disclosed to your spouse. The court takes the business into account as a potential financial resource of the spouse who retains the business.
If your business has multiple employees, the business' value is determined by the usual valuation processes.
Partnership businesses can be categorised in two ways: spouses in partnership and partnerships with a third party or parties.
Spouses in partnership
Very similar to sole trader business, the value of a “spouses in partnership” business structure is determined by its value to the owner. If you and your former spouse have worked in the business and then choose to divorce, it will certainly affect business continuity since it's rare for two former spouses to operate the business together after divorce.
If your business has employees, it will undergo the usual business valuation process.
Partnerships with a third party or parties
A divorce will have a significant impact on other business partner/s. Since there's a requirement to give disclosure, not all third party partner/s will be willing to do so. During proceedings, the court takes into account partnership agreements made with third party partner/s and considers the effect of the divorce on the partnership as well as the third party's rights.
When a business value has been determined
Once the business' value has been determined, your family law attorney can start negotiations and, eventually, reach a property settlement. In the event that an agreement isn't reached, the settlement is referred to the court and the valuation may be used by the court to determine an outcome.
Protect your business
When it comes to protecting your business, proper legal planning is key. A family law attorney can help you plan appropriately, even if you're not divorcing. This helps you protect your assets as well as third party partners.
If you need more information or would like to discuss your family business matter, get in touch with the experienced team at Marino Lawyers. Our family lawyers in Cairns can assist with difficult family law and related matters. Call us at (07) 4081 6700.