How is a Business Divided in a Divorce?
When a couple divorces or separates, a property settlement, also known as the division of assets, is almost always necessary.
In some cases, this process will involve assets like a home, cars, money, and superannuation and in other cases, it may involve complex and highly valuable assets, such as a business.
In this article, we’re going to discuss how a property settlement involving a business should be handled, including the various steps that should be taken.
Property Settlements and Businesses
The breakdown of a marriage or de facto relationship can have a significant impact on a business. Whether both parties to the relationship own the business or it is owned by one party only, the future of the business could be impacted as the business is considered part of the marital property pool.
It’s important to be aware that the breakdown of a relationship where a business is involved could impact not only the couple, but also any other owners of the business, as well as anyone else with an interest in the business.
What happens to the business when a couple breaks up?
As we touched on above, it doesn’t matter whether the business is owned by one party or both parties to the relationship – in most situations, it is considered to be an asset that could be divided in the property settlement.
The way assets, property and liabilities are divided in a property settlement involves a 4-step process. These steps are:
- Identify all assets and liabilities – during this step the value of the business will need to be identified.
- Step 2: Identify the contributions of all parties – contributions can be financial and non-financial, as well as direct and indirect. Even if one party never worked in the business, their contributions to the relationship could make them entitled to a percentage of the business.
- Step 3: Work out the future needs of each party – factors such as parenting, health and age can impact the future needs of each party.
- Step 4: Review the agreement – the property settlement agreement must be just and equitable.
Identifying the assets in step one is particularly important and it also involves valuing them too. In the case of valuing a business, this can be complex as many factors determine the value of a business. This can also be an area of contention for separating couples, so it is highly recommended that a professional business valuation expert is engaged to avoid disputes arising.
The aim of these steps is to work out the percentage of the overall property pool that each party is entitled to.
Who actually gets the business in a property settlement?
The way assets are split can be complex and will differ from situation to situation. When it comes to a business, there are many different outcomes that could occur.
One potential option is that the one former spouse buys out the other spouse’s interest in the business. Another option is that the business is split, with each party receiving part of the business. Selling the business to third party and splitting the proceeds in the property settlement is another option. If there is agreement, there are certain circumstances where former spouses could continue to own and operate the business as is.
The right option is dependent on the unique factors of your situation and the type of business operated. In some cases, the former spouses may have an amicable relationship where their split hasn’t interrupted the business operations, while in other cases, there has been a significant loss of trust and it’s not possible to come to an agreement.
It’s best to seek legal advice before making a decision regarding a business in a property settlement as there can be long-term consequences of these decisions that could be overlooked.
What if the former spouses cannot reach an agreement for their property settlement?
The family law system in Australia has been designed to allow people to reach agreements together or to use other resources to avoid having to go through Court proceedings. However, while the system allows for this, it’s not always possible to come to agreements, and in matters that involve complex property and assets, like a business, Court intervention may be necessary.
In this scenario, the parties apply to the Federal Circuit and Family Court of Australia for a property division. The Court will use the same 4-step process we outlined earlier to determine an appropriate split of assets and liabilities, including the business. It’s important to note that the Court may require that an independent valuation of the business takes place where the parties cannot agree on the value.
As a property settlement is meant to be a way to finalise the financial relationship or sever the financial ties of the former spouses, the Court will be likely to make a decision where one person may receive the business while the other receives other assets that equate to their share of the assets and property, or if this is not possible, the Court may order that the business is to be sold. The aim will be to not only finalise the financial relationship but also to ensure that the property settlement is just and equitable.
Can you protect a business?
Protecting a business from being impacted by a relationship breakdown is possible, however, it is highly recommended that a lawyer is engaged.
Whether you’re considering marriage or in a relationship and own a business, or you’re considering starting a business while in a relationship or marriage, there are various options available to you. A binding financial agreement that outlines how assets are managed in the event of a relationship breakdown is one of these options.
As many unique factors are at play with relationships and businesses, we highly recommend seeking legal advice if you wish to protect your business or any other asset.
Talk to our property settlement family lawyers
If you’ve separated and are having difficulties in determining a property settlement agreement or you’re wanting to protect your assets, talk to our property settlement family lawyers today.
Our experienced legal team is here to offer advice, guidance and representation for all types of family law matters, including complex property settlements.