When a couple separates or divorces, it is usually always required to distribute their assets between them.
There is one legal concept that applies to all types of assets, regardless of their value: what is “fair and equitable” under the circumstances. When it comes to protecting more complicated assets, like a business, after a divorce, there are several critical actions you should take. An in-depth look at the process of divorcing your business is provided in this article. But one thing you should have in the back of your mind when ready is that litigation does not need to be your default position. Increasingly, mediation and in particular arbitration are being used to resolve property disputes often regarding businesses.
When a family business is divided following a divorce or separation, how are the assets divided?
When a couple is contemplating a separation or divorce and one or both parties operate a business, concerns about the ownership of the business, regardless of the type of entity it is, will inevitably surface. The dissolution of a relationship poses a risk to everyone associated in a business, from the couple themselves to other business partners and anybody else who has a financial interest in the company. You can count on it that all involved in the business will become very jittery and nervous. As a result, considering the implications of a family law action on business ownership should be normal corporate risk management for every organisation. This is especially true in the case of a family-owned business. So, an important take-home message for all business owners is to ensure that marital relationship breakdowns are entertained within the risk management of the business.
When a relationship begins to deteriorate, it is common for the business to become the centrepiece or put bluntly, the battleground of the dispute. An attempt to divert assets or suppress information that is essential to correctly evaluate the business are likely to form some of the accusations that will be passed around all who have an interest. To avoid complications, it is necessary that all parties move with care and get legal guidance as soon as feasible. These things have a real tendency to escalate very, very quickly, so save yourself the pain and get prompt legal advice from family lawyers with strong expertise in property settlement matters that involve businesses. It’s a bespoke, expert area.
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Is this something that happens to de facto couples?
In the case of married couples, the regulations for property distribution and company ownership are nearly identical to those for de facto couples. Under the Family Law Act 1975, any commercial interests in a de facto relationship can be deemed assets for the purposes of dividing the marital estate.
Individual cases are evaluated on the basis of the rules that establish a de facto relationship, which are individual to each situation. As a general rule, however, if you are in a true domestic connection with someone, there is the possibility that the relationship will be deemed a de facto one. You should be aware that even if you have been in a long-term relationship with your partner but live apart from him or her, you may still be regarded to be in a de facto relationship. If you have any concerns regarding the current condition of your relationship, you should get legal assistance from a family lawyer or one of our team at Mediations Australia who can assist with the determination.
What happens to a company in the event of a divorce?
It is considered a marital asset for the purposes of division when one or both spouses operate a business. There are, however, a few notable exceptions to this general rule of thumb. First and foremost, if the couple entered into an enforceable agreement (such as a prenuptial agreement), the business may not be subject to a property settlement when the couple divorce or separates.
- Marital assets are distributed upon the application of a four-step formula. These steps define what constitutes a reasonable and equitable allocation of:
- Determine the value of all assets and liabilities owned by both spouses;
- evaluate the financial and non-financial contributions made by each spouse;
- take into consideration the future needs of each spouse;
- and determine what division of property is just and equitable in all of the circumstances of the marriage.
In this procedure, it is vital to highlight that Step 2 takes into consideration a variety of elements, including the non-financial contributions that each person contributes to the marriage (such as parenting and maintaining a home). This implies that even if a spouse did not actively contribute to or support the business, that spouse may still be eligible to receive a portion of the business in the event of separation or divorce.
The marital asset test, as described above, determines what percentage of the property pool one spouse should be entitled to receive from the other. For example, the distribution may be 50/50 or 60/40, or 70/30 depending significantly on the contributions made by each partner and the requirements of the future. There is no hard and fast rule that applies to who gets what and this is particularly the case when there are complex assets involved, like a business.
In the event of a divorce, who gets the business?
This is a tricky question and obviously differs from case to case.
When a business is involved in a property pool, there are a variety of different property settlement outcomes that might occur. The following are the most often encountered outcomes:
- If a business is sold to a third party, the proceeds are considered as cash in the property pool. If one spouse arranges for the buyout of the other spouse’s interest in the business, the proceeds are treated as cash in the property pool.
- Ex-spouses retain ownership of their business and make the necessary modifications to its operations so that their professional connection may continue after the end of their personal relationship;
- the business is divided, and each spouse receives a portion of the business.
The parties to a divorce may determine that any of the possibilities listed above is the best option for them based on their individual circumstances. Some options, on the other hand, are more difficult than others. For example, if a former spouse continues to work together in the same business, this might be a source of anxiety in the long run. A common norm of family law is that the split of assets following a divorce should be final, and this is true in all cases.
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Is it possible to divide a business during a divorce?
Some divorcing spouses decide to divide their business into two separate and functioning organisations. For example, if a business has two functioning sites, each spouse can purchase a 50% interest in one of the locations.
As a result, the parties should take into consideration the implications of dividing the business. Will the individual elements of the company or whatever structure it is, be able to survive if they don’t work together? Has the value of each component been determined with precision? So, what kind of ownership structure is necessary to ensure that each partner is legally free of the other’s obligations?
The process through which the family court determines its judgement
Whenever you are unable to achieve a private agreement about the division of marital assets or the worth of a business, you can ask the Federal Circuit and Family Court of Australia to make this judgement on your behalf, if you live in Australia. If the parties are unable to come to an agreement on the value of a business, the Court will almost probably order an independent valuation of the firm to be conducted. The Court will utilise this assessment to determine each party’s claims in the event of a fair split of assets between the parties.
It is also likely that the Court will be reluctant to issue an order involving the continuation of a former couple’s financial implications. If it becomes essential to sell the business in order to achieve a fair and equitable split of property, the Court will order that it be sold. But if the Court is able to divide other marital assets in order to accomplish an equitable distribution of property, this will not be necessary. For example, one spouse may retain ownership of a profitable business while giving up all stake in the family home or investment properties or whatever the case may be.
How do you determine the worth of a business in the event of a divorce?
Reaching an agreement on the valuation of a business may be a significant stumbling block in the process of finalising a property settlement.
An asset such as a home may be reasonably simply evaluated using a market evaluation; on the other hand, evaluating a business is fundamentally more challenging. If a divorcing couple wants to avoid going to court, reaching an agreement on the worth of their business is crucial, regardless of how tough the process may be.
In order to ascertain the genuine worth of a firm, it is normally required to retain the services of a business valuation specialist. A company appraisal performed by an impartial third party might help to clarify the property settlement process. The vast majority of experts that perform these services are certified in business valuation (ABV) and/or are Certified Valuation Analysts (CVA), Accredited Senior Appraisers (ASA), or Certified Business Appraisers (CBA), among other designations (CBA).
It is essential that the independent appraiser produce an accurate evaluation of the business value that is free of prejudice or favouritism. The worth of a business is determined by a variety of criteria, some of which are complex and need a detailed examination of the company’s financial records. The date of the property settlement or court hearing, not the date of the couple’s separation, is used to determine the worth of the business.
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In most cases, the independent appraisal differs from the anticipated sale price on the open market in some way. Instead, the valuation takes into account the advantages that the owner would obtain if they were to continue to have an interest or play a part in the company. For example, if one spouse will be able to continue in the capacity of CEO, this is an extra benefit that should be taken into account when determining the value of a firm.
Based on the size and kind of business, numerous ways to determine a business valuation might be used, however, the following factors are likely to be taken into consideration by the valuer:
- Considering the consistency of the profits as well as the likelihood of future costs, business income is calculated.
- Assets, liquid assets, and liabilities pertaining to a business
- Whether or whether the company has ceased operations or is still in operation;
- Cash flow projections for the future;
- Estimates of the earnings that would be made if the firm was sold
- What type of business is being classified (eg is it a sole trader, partnership, listed company, private business, a company-held business, or trust arrangement).
It is crucial to understand that even if a business has minimal monetary worth on the open market, it is nonetheless taken into account during the course of a real estate transaction. A business that has the potential to provide an income stream symbolises a future financial resource that the spouse will have access to.
Methods for safeguarding your business in the event of a divorce or separation
If you are in a relationship and also run a business, we recommend that you consult with an expert Family Lawyer about your options. If you are in a relationship and thinking about launching a business, this is much more vital to consider. This is an excellent moment to consider how you might arrange your company in order to safeguard it in the case of a future relationship split.
It is possible that you and your partner will want to enter into a legally enforceable financial agreement so that you and your partner can agree on how assets will be shared in the case of divorce. This document can be signed either before or during your marriage or romantic connection.
Additionally, you can engage into an agreement with the other owners of your company. You can include a provision in that agreement stating that any unmarried owners must execute a prenuptial agreement before they get married. It is possible that the prenuptial agreement will stipulate that the prospective spouse agrees to waive any and all rights in the business.
Alternatively, you can arrange for a transfer of shares in the case of a divorce between business owners, ensuring that ownership of the company is maintained at the time of the divorce. Another option is to place the business in a trust so that it is quarantined from other property assets.
What Should You Do Now?
At Mediations Australia, we have a team of family lawyers and mediators who can assist you in Sydney, Perth, Adelaide, Melbourne and all other locations in Australia. We also do international family law matters.
Getting legal advice early is the most important thing to do.