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.
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.
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 is going to receive from the property pool. If they cannot agree then the Federal Circuit and Family Court of Australia will decide for them. In making this decision, the Court will consider things such as the length of the relationship, the contributions of each party to acquiring and keeping the assets of the relationship, and each person’s future needs.
Dividing a Living Business
If the business is to continue to operate, then 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. In some cases, forensic accountants or business valuation experts may be enlisted to provide impartial assessments of the business’s worth.
Once the value of the business has been 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 in the business or have made significant contributions to its success.
The Court has broad discretion to make orders for the division of property. For instance, one spouse may be ordered to buy out the other’s interest in the business, either through a lump-sum payment or a series of instalments over time. This option allows one spouse to retain ownership and control of the business while compensating the other for their share of its value.
Alternatively, it may order the sale of the business and the equitable distribution of the proceeds between the spouses taking into account the distribution of other assets of the relationship (such as the family home or superannuation accounts).
While selling the business may not be in the financial best interests of either party or the business itself, the Court will make this order if it is the only equitable way to ensure that the property pool is divided between the parties.
In most cases, the Court prefers there to be a clean and final separation of all marital assets after the breakdown of a relationship. However, in some cases, the best option is for the spouses to continue operating the business together post-separation, either as joint owners or through a partnership or corporate structure. While this arrangement can be fraught with challenges, particularly if the spouses have a contentious relationship, it may be the best option for preserving the value of the business and ensuring its ongoing viability.
In such cases, it is essential to establish clear guidelines and protocols for decision-making, conflict resolution, and the division of responsibilities to minimise friction and maximise cooperation.
Conclusion
Ultimately, the fate of a family business after a couple separates in Australia depends on a variety of factors, including the value of the business, the contributions of each spouse, and the willingness of the parties to cooperate and compromise. While the process can be fraught with challenges and uncertainties, seeking the guidance of experienced legal and financial professionals can help couples navigate the complexities of dividing assets and planning for the future.
By approaching the situation with pragmatism, transparency, and a commitment to fairness, couples can mitigate the impact of divorce on their business and lay the groundwork for a successful transition to the next chapter of their lives.
This is general information only and you should obtain professional advice relevant to your circumstances. If you know someone who may need assistance or advice on how to proceed please contact us on (08) 8155 5322 or email [email protected].