Businesses and divorce – how are business interests treated in family law matters?

Separation can have a significant impact upon your business. The impact can be considerable  if you run your business with your former spouse, or if there are other third-party partners or shareholders in the business which will be impacted by your separation.

In most cases, the business interests of either spouse will be valued and included in the pool of assets available for division between spouses as part of a property settlement.

As is the case with other assets owned by either party, each party must disclose all financial and other records of any interest they have in a business. This includes bank records, financial statements, BAS statements, tax returns, partnership agreements, trust deeds and other financial documents relevant to the business in question.

Where third party business owners or shareholders are involved, they can be reluctant or opposed to providing the required financial disclosure. This does not negate the requirement for disclosure to be made.

What happens to the business in a divorce?

In cases where only one spouse is involved in the business or has a skill or qualification unique to the business itself, that spouse will usually keep their interest in the business as part of a property settlement. The other spouse will generally keep an appropriate share of the other assets, taking the value of the business into account.

In cases where spouses own a business together, disputes can arise about who will keep the business and what the business is truly worth. Problems can also arise with respect to the day-to-day operations of the business until a property settlement is reached or a court decides who gets to keep the business. After all, in these cases, the business is what provides each spouse with the income they need to survive.

Under the Family Law Act the Court has a duty to end the financial relationships between the parties to the marriage and avoid further proceedings between them. Because of this, the Court is generally opposed to spouses continuing to own businesses together indefinitely.

When a business forms part of a property settlement, there are a number of possible options and outcomes including that:

If one spouse owns the business:

1. That spouse keeps their business. In this case, the other spouse will likely keep an appropriate share of the other assets available for division, which may include a cash payment taking the value of the business into account;
2. The business is sold to an independent buyer and the sale proceeds are included in the pool of assets to be divided between spouses as part of the property settlement;

If both spouses have interests in the business:

1. One spouse keeps the business by ‘buying out’ the other spouse’s interest and the business is restructured as necessary. Again, this would likely involve the other spouse keeping an appropriate share of the other assets of the relationship, taking the value of the business into account;
2. The business is sold to an independent buyer and the sale proceeds are divided appropriately between spouses as part of the property settlement;
3. The business interests are divided, and each spouse retains a separate part of the business as part of the property settlement. This is less common and can be difficult to achieve without cooperation and agreement by both spouses.

If one spouse owns the business with third parties:

1. That spouse keeps their interest in the business, and their share of the business is valued for family law purposes. Again in this case, the other spouse will likely keep an appropriate share of the other assets available for division;
2. The spouse sells their share of the business to the other owners, or another third party, and the sale proceeds are divided appropriately between spouses as part of the property settlement.

If both spouses own the business with third parties:

1. One spouse keeps their interest in the business, the other spouse exits the business, and the business is valued for family law purposes. Again in this case, the other spouse will likely keep an appropriate share of the other assets available for division;
2. The spouses sell their shares of the business to the other owners, or another third party and the sale proceeds are divided appropriately between spouses as part of the property settlement.

How is a business valued for family law purposes?

The value ascribed to a business can have a significant impact on what ultimately happens in the settlement or court decision.

How a business is valued and treated as part of a property settlement depends on the structure, and nature of the business itself. For example, businesses operated by sole traders may be valued differently to businesses operated as partnerships or under a corporate and/or trust structure.

For family law purposes, a business valuation must be conducted by an expert valuer who is jointly engaged by both spouses, usually through their lawyers. An expert valuer is someone with ‘specialised knowledge based on their training, study or experience’.

It is prudent to engage an expert valuer who is experienced in preparing business valuations for family law purposes. That way there can be confidence that the valuation report meets the conditions and standards required if the dispute ends up in court and is not discounted or thrown out.

It is usually insufficient to rely on a valuation prepared by the accountant for the business, as they may lack the required expertise and potentially be aligned with the spouse who runs the business.

Expert valuers are provided by the parties with relevant financial and other information required to allow them to form an opinion. Such information includes tax returns, financial statements and current and future contracts and service agreements. Expert valuers will generally provide a list of all documents they require and may conduct site visits, if necessary.

Property settlements involving businesses can be complex and stressful. It is important to seek specialist family law advice regarding your situation as early as possible.

If you need advice in relation to your family law matter, please contact us.