When two people decide a relationship has reached its end and it’s time to separate or divorce, they’re both keen to achieve a clean break.
Unfortunately, unpicking the ties of a relationship can be a complicated and time-consuming process, particularly where a business owned and run by either one or both parties to the former relationship is involved.
It’s this scenario we’ll provide some more information on here. This is because a business – whether you operate it as a sole trader, in a partnership, or through a company or trust structure – is considered as property for the purposes of the Family Law Act 1975. This means its assets and value can be considered by the court if it is asked to make a division of property assets from the relationship in a final settlement.
For this reason it’s essential you seek legal advice from specialists in this part of the law. At Arbon Legal Group, determining how your business will be affected by a divorce is one of our areas of expertise.
The need for full and frank disclosure
It’s important to understand that should business assets become part of a property settlement after divorce, there is an obligation on each ex-partner to provide full and frank disclosure of all business records, financial statements, bank records, BAS and tax documentation to the other side. This is an ongoing obligation for however long the settlement process takes.
Such disclosure takes a lot of time, time you may not have, and so you may require the assistance of experts such as experienced legal representatives, a financial adviser or accountant, and a valuer of business assets.
Divorce and the type of business you own
The type of business you run affects how the asset will be treated in a property settlement after divorce. The value of a small business operated as a sole trader, or which both ex-spouses ran as a partnership, is different to a business that boasts a corporate and/or trust structure, with larger assets and values such as goodwill.
In most sole trader set-ups, such as a tradesperson without employees, a court will generally find that the spouse whose skills and expertise are the reason for the existence of the enterprise should retain it. In this situation where one ex-partner retains their interest in the business, it needs to be attributed a value, which may be a modest amount when there are no employees or extensive assets.
If the business does have a number of employees plus other value to be found in other assets and goodwill, a proper business valuation process should be undertaken involving examination of the business’ financial records and accounts so that it can be considered as part of a property settlement after divorce.
If a couple ran a business in partnership, the situation is similar to that of the sole trader in that a value will need to be determined for the business if one partner wishes to retain the business post-divorce. Again, formal valuation will be necessary if the business is more established in terms of employees, assets and goodwill.
Once a value is established, the partner who wishes to continue with the business may pay out the ex-spouse their share of the business as part of a property settlement.
The party to the divorce who retains the business maintains what the court describes as a ‘continuing financial resource’. This resource will be taken into account during a property settlement when the court considers the future needs of each party when dividing assets.
In some cases, ex-spouses continue working in the business despite their break-up. In this event it’s suggested they negotiate a financial agreement, sanctioned under the Family Law Act, to deal with the possibility that they later wish to go their separate ways and need to sell their share of the business, or the business entirely.
In situations where you are in partnership with third parties, or own a business under a company or trust structure, seek expert legal advice as the impact of divorce becomes more complicated.
The problem of valuation
One of the common sticking points when it comes to a property settlement as a result of divorce is reaching a mutually agreeable position on the value of the business.
Where each party cannot agree on the business value, or one of them expects a greater share based on their contribution to building the business, it will be left to the Family Court to help settle the matter. This could involve the Court ordering the sale of the business with the proceeds divided on a just and equitable basis.
The ex-partners, or the Court, may also appoint an independent valuer to provide a more accurate estimation of the value of the business, which they provide to the Court as an expert witness. This value can help the Court to decide on an equitable division of assets between the ex-spouses.
Generally speaking this estimated value is not the price of the business if it were to be sold but its monetary value to the owner as well as the profits and other benefits the owner would derive if they continued operating the business.
Factors considered in a business valuation include it earnings over time; whether the business has stopped operations, or continues, and; estimates of future cash flow and also profits if the business were to be sold.
One recent example which illustrates the division of business assets in Family Court proceedings is the 2016 case of King v Hamidou (‘King’).
In King, the parties operated a number of businesses before their marriage ended after 14 years. ‘D’ Business, as it was known during the proceedings, was the subject of the property settlement because both parties wished to solely retain their interest in this successful venture.
The Court considered the direct and indirect financial and non-financial contributions of each party to the enterprise. It also considered the competing valuations of the business, with Ms King providing a valuation of $3.8 million and Mr Hamidou claiming it was valued at $4.2 million.
The parties’ post-separation contributions to the business were also important, with the Court finding Ms King had continued to operate the business and that her work had returned it to profit due to her financial management.
Assessing all these factors, the Court adjusted the overall asset pool for settlement to 52.5 per cent in favour of Ms King and 47.5 per cent to Mr Hamidou, with Ms King to retain ownership of the business. As part of retaining the business she was ordered to pay her ex-spouse $1,299,740.50 within three months of the date of the orders.
Contact Arbon Legal Group for further advice
When a business becomes part of the asset pool that needs to be divided in the unfortunate event of a divorce, matters can become complicated and, in some cases, an ongoing source of conflict.
Disputes about the value of the business, the contributions of each party to the venture before, during and after the marriage, and the needs of each party post-separation, are all areas of contention which can end up in costly and time-consuming proceedings in the Family Court.
At Arbon Legal Group, advising clients experiencing divorce on how to approach division of a business is one of our specialties. We have many years of experience on how to navigate your way through a potential property settlement in order to get a result that works best for you. Call or email us today for an initial consultation on (07) 5562 0444 or firstname.lastname@example.org.