When a marriage ends, regardless of whether a couple was in business with each other, lives suddenly have to be re-arranged in a thousand ways.  One of the concerns among businesspeople is how to protect the business.  When both spouses are actively involved in the business, the common assumption is that both have a claim to its assets in a divorce.  When one spouse is less involved, or not involved at all, the business is still likely to be viewed as an asset of the marriage, subject to division on divorce.  There are some common misconceptions about how the assets might be divided in those cases and some very important legal tools and techniques to minimize the harm that might otherwise come of legal self-help.  You don’t do your own dentistry.  Don’t do your own property settlement agreement in a mistaken effort to save legal costs.  If you find yourself at this difficult crossroads, rely on the experienced family lawyers at Owen Hodge Lawyers to negotiate and structure the best possible arrangement to protect your business.  Contact us on 1800 770 780 or via e-mail at http://www.ohfamilylaw.com.auhttps://www.owenhodge.com.au/contact/ to schedule a consultation.

How to Minimize Risks

One spouse should disengage as quickly and cleanly as possible.

The decision to divorce is often a relief, and the strange immediate aftermath may be an improvement in your relationship with your soon-to-be-ex-spouse.  That may not last, and many attorneys advise the less active spouse to disengage from the business as quickly and cleanly as possible.  The continued health of the business may be of vital interest to both parties.   If you are operating it together, the difficulty of working out a property settlement may make it nearly impossible to collaborate on business decisions as before.  It may leave customers insecure about the continuation of a commercial relationship and employees uneasy about job security.

Continued access to financial information is priority.

One spouse may attempt to freeze the other out of the information necessary to value the business accurately or, even worse, may attempt to divert assets.  If the spouses have applied for business credit together, the creditworthiness of both will continue to be affected by future business prosperity, even if one has no continuing involvement.  The division of a self-managed superannuation fund, if one exists, presents special technical legal issues.

Misconceptions about the valuation and division of assets in a divorce are commonplace.

The assets of a business will be valued at the date of settlement or the court hearing, not the date of separation, which is yet another reason to keep the business healthy as negotiations progress.  If a business has little value but produces an income stream, it will be taken into account as a financial resource available to the relevant spouse.  Spouses who have given up work to care for children, but who have the capacity to obtain appropriate employment, may have to return to work after divorce. The other spouse may not be required to provide additional maintenance apart from child support.  These are all reasons to seek legal advice promptly, even in anticipation of a decision to divorce.

Useful Tools and Techniques

Unless no other choice exists and even then only for a temporary period of time, divorcing spouses should not attempt to continue to operate a business with one another.  Preserving the enterprise will thus require that one party buy the other one out.  Several approaches are listed below, in rough order of decreasing attractiveness.

  •  If the marriage has sufficient resources, the most obvious choice may be to offset the value of the business with other assets.  Swap the business for the house and boat, be done with it and walk away.
  • Another choice may be to pay the buyout price from company profits over time.  This, of course, requires the company to continue to have profits and the payee to continue to have at least some residual trust in the other to run the business capably and in good faith.
  •  A third option may be for the spouse continuing in business to borrow funds from a bank or other third party lender to buy the other’s share.  Borrowing on personal credit or the credit of a business when the business partner/spouses are divorcing may be difficult.
  • Another option is to simply sell the business on the open market.  Price may be affected if the buyer knows of the sellers’ incentive to sell.
  • Finally, it may be possible to bring in another investor.  This is likely to be a relative of the spouse remaining in business because, really, what stranger would be so rash as to venture into a situation so fraught with complication.

All of these options presume a full and fair valuation of the business that considers both tangible and intangible assets.  This can be particularly challenging the case of an SME.  It is best to act promptly to preserve the quality of information on which the valuation will be based.  You will be better prepared to make these decisions and act on them with full and unbiased financial and legal advice.

If you are facing a divorce, you should be concerned about preserving the value of your business, whether or not you operate this business with your spouse.  Seek experienced professional advice of the family lawyers at Owen Hodge Lawyers.  Our offices are conveniently located in both Sydney and Hurstville.  Contact us as soon as possible at 1800 770 780 or via ohl@owenhodge.com.au.

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