Divorce can often have a significant impact on business owners as their business and personal life are often connected. In Australia, property settlements regarding family law are regulated by the Family Law Act 1975, applying to married, de facto and same sex couples. The process generally involves 4 steps including:
- Identify Property and Liabilities Pools: which determines all property, regardless of ownership including all assets, liabilities, financial resources and superannuation. If both parties dispute over asset values, expert valuation may be required to determine the values.
- Assess Contributions: which determines both parties financial and non-financial efforts of contribution to the relationship as a percentage, including contributions made by third parties (such as parents) on behalf of one of the parties
- Future Needs: compares the parties’ current and future financial circumstances to determine whether there should be an adjustment in favour of one party against the other
- Fair and Equitable: where the court will not accept a settlement of the parties if they believe that it is not fair and equitable and one party may have an advantage over the other.
One reason that divorce can be tricky when owning a business if that the business may fall under the category of the property pool. To minimise the interruption or loss, the business should be planned with the assistance of a professional.
Some things to consider to protect your business includes a trust, prenup, buy sell agreements and record keeping all financial records.
A trust is a legal arrangement for one party to manage assets for the benefit of another, which provides control and protection. Trusts (if properly created and managed) have the potential to assist in protecting assets in specific circumstances, but there is no guarantee.
A prenup is a legal contract between spouses to determine the division of assets in the event of a divorce. The agreement can help to provide clarity surrounding the business operations if a relationship breaks down by determining who will run the business.
Buy-sell agreements deal with a range of matters that are governing the relationship between the business owners. The agreements will usually include provisions that will set out what will happen if a specified event occur (such as the divorce of a partner)
Record keeping financial records is an important step in helping protect your interests in a family law situation. By recording financial and non-financial contributions to the business, it can help to determine each party’s interests if there is a negotiation about property settlement.
Protecting a business during a divorce is important as it is a representation of the years of hard work, time, dedication and investment that has been put in. For many business owners, their business is not only one of their most valuable assets but also their main source of income. By properly protecting your business from the start, you can secure your personal wealth, prevent forced sales during a settlement, ensuring the future of your business and its success.
Dividing the business during property settlement can also lead to numerous challenges. The main disagreement during property settlement is the valuation of the business and how much it is worth. This dispute can lead to costly court battles to determine the value. To prevent this, a neutral, joint business valuator that is certified by the Australian Valuers Institute or Business Valuers Network is hired. When settling, business owner rarely has spare liquid cash in the company to pay out a spouse and withdrawing too much cash from the business can often ruin the business operations. Instead, owners solve this problem by either paying their spouse in installments or trading the spouse the family home for their share of the business. Another dispute to determine is which spouse gets ownership of the business. Generally, one spouse will be granted full ownership and buy out the other. However, if this is not possible for the business, the courts may force the business to go on sale and divide the profits.
In summary, owning a business is difficult but losing that business due to family law matters can be even more challenging. Generally, property settlement laws follow the process of determining the property pool, assessing contributions from each spouse, determining the future needs and deciding if the final settlement is fair and equitable to both parties. To prevent the business from being part of the property pool, business owners should seek professional advice on how to protect the business from the start to prevent the risk of losing it, having to sell or give full ownership to the other spouse. By taking the right measures, business owners will still have a successful business despite personal family issues.