Divorce is almost always a difficult and disruptive life event. For couples who own a family business, the stakes are particularly high, as the fate of the business often becomes a central point of contention during divorce proceedings.
In Australia, a family business is considered part of the asset pool of the relationship, regardless of whether it was established before or during the relationship. Navigating the complexities of separating business and personal interests after separation requires careful planning and help from the right professionals.
Table of Contents
- Death of a Business
- Dividing a Living Business
- What Courts Consider
- Continuing to Operate the Business Together
- Conclusion and Next Steps
Death of a Business
It is realistic to acknowledge that not all family businesses survive the upheaval of divorce. Some businesses may struggle to weather the financial strain and operational disruptions caused by the separation, leading to their eventual closure or liquidation.
Others may be irreparably damaged by acrimony and conflict between the spouses, making it impossible to continue operating in any meaningful capacity. In such cases, the spouses may be forced to sell off the business assets and divide the proceeds as part of the property settlement.
Effect on Property Pool
When this happens, the realised value of the liquidated business (if there is any) is simply added to the spreadsheet that tracks the total property pool of the relationship. The separating parties then need to agree on what percentage split each person will receive from the property pool.
If they cannot agree, the Federal Circuit and Family Court of Australia will decide. The Court will consider factors such as:
- The length of the relationship
- The contributions of each party to acquiring and maintaining the assets of the relationship
- Each person’s future needs
Dividing a Living Business
If the business is to continue operating, the first step is to determine its value as a going concern. This can be a complex process, especially for businesses with significant assets, intellectual property, or goodwill.
Valuation methods vary depending on the nature of the business and may involve assessing factors such as revenue, profits, market trends, and industry benchmarks. Forensic accountants or business valuation experts may be engaged to provide impartial assessments.
One common method is to obtain a professional independent valuation, which can be presented to the court by an expert.
Deciding How to Divide the Business
Once the business’s value is determined, the next step is to decide how it will be divided between the parties. This can be particularly challenging when both spouses are actively involved or have made significant contributions to its success.
The Court has broad discretion to make orders regarding division of property. Options include:
- Ordering one spouse to buy out the other’s interest through a lump-sum payment or instalments over time, allowing them to retain ownership and control
- Ordering the sale of the business and equitable distribution of the proceeds, considering other relationship assets like the family home or superannuation accounts
While selling the business may not be financially ideal for either party or the business itself, the Court will make this order if it is the only equitable way to divide the property pool.
What Courts Consider
In deciding property orders, the Court considers the overall fairness of the division. It prefers a clean and final separation of marital assets after the relationship breakdown.
However, in some cases, continuing joint operation of the business is the best option to preserve its value and viability.
Continuing to Operate the Business Together
Some spouses may continue operating the business together post-separation, either as joint owners or via partnerships or corporate structures.
While this arrangement can be challenging, especially if the spouses have a contentious relationship, it may help preserve the business.
Clear guidelines and protocols for decision-making, conflict resolution, and division of responsibilities are essential to minimise friction and maximise cooperation.
Conclusion and Next Steps
The future of a family business after separation in Australia depends on many factors, including business value, each spouse’s contributions, and willingness to cooperate and compromise.
While the process can be complex and uncertain, obtaining guidance from experienced legal and financial professionals can help couples navigate dividing assets and planning for the future.
By approaching the situation with pragmatism, transparency, and fairness, couples can reduce the impact of divorce on their business and set the foundation for a successful transition.
This is general information only. For advice tailored to your circumstances, please call 03 5747 8251 or email [email protected].