What Happens to the Business in a divorce

Article Maidei Kutsanzira 10 April 2019

What happens to the Business in a divorce?

When a couple decides to separate or divorce there are so many issues that need to be considered.   From working out how to divide financial assets such as a home and savings, through to the highly emotive concerns that arise when children are involved and parenting arrangements, need to be determined. 

One of the most complicated situations occurs when a couple own a family business.  Whether the business is a small trade-based firm, or a large manufacturing business, the questions and concerns most often raised are the same:

• How can we separate the finances and 'untangle' our financial relationship?

• Does one partner have to 'buy out' the other?  How much would that cost?

• Who gets what in the property settlement, especially if we have both worked hard to make the business a success?

• What about future earnings from the business?

What is the business worth?

One of the first steps that needs to be taken in any separation or divorce is to work out what assets the couple own and how they can be divided in a just and equitable manner.  When a business is involved, it can be difficult to determine both the value of the business now and what the potential future value might be.

Until a business value is agreed upon, negotiations might be difficult and it will be hard to determine a just and equitable settlement for both parties.  Before negotiations take place, an independent valuer may need to be appointed to provide an accurate estimate of what the business is worth. 

One of the most important things to remember for separating couples is that when a business is valued for the purposes of their family law property settlement, it is not the same as the value that a business would be sold for.  It focuses on the value to the owner, or what the benefits would be to the owner if they retained their interest in the company. 

An independent valuer will consider things such as whether a business is ongoing, whether the earnings of the business are stable or whether they fluctuate from year to year, and whether the business has any "goodwill".  Goodwill is treated like an asset and can include things like the reputation or the location of the business. 

What options are available?

An important point to note is that the options available to separating spouses who also own a business will vary, depending upon the nature and structure of the business.   One partner can choose to 'buy-out" the other, one partner can hand over more of the other asset pool such as real estate or savings in return for the business, the business could remain running as is with future profits split, or the business can be sold and the proceeds divided between the parties.

Under the legislation governing Family Law, a business becomes part of the overall asset pool that must be considered during the separation and division of resources.   This means that it is vitally important for couples to obtain independent legal advice when separating to ensure that their best interests are taken into account.   

Generally speaking, it is always better to negotiate a settlement that takes into account the individual nature of the business, its operations and its value, rather than leaving the Court to decide an outcome - which could ultimately damage the business in the long term.  An experienced family lawyer understands the processes involved, and will work with you to identify the best possible resolution, and then negotiate on your behalf.

If you would like to discuss the impact of divorce or separation on a business, call our experienced family lawyer, Maidei Kutsanzira, on ph: 02 8566 2400. 

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