When separating, whether you are married or in a de facto relationship, often some of the first concerns relate to children and how they will cope. This is closely followed by concerns about what the separation will mean for you financially. When your mind turns to any businesses you own, either together, individually or in partnership with others, it raises the question, ‘What happens to a business in divorce?’
There are many scenarios that can play out where one or both people have business interests, and here we will unpack the key elements to be aware of.
The Financial Risks
As part of the financial disclosure process in a property settlement, the nature and extent of the property to be divided is determined, which means businesses are required to be valued.
The valuation of a business is calculated taking into consideration a range of factors. The most obvious element is connected to historical financial performance but can also take into account the following, all of which are reflective of a moment in time:
- how the economy is performing,
- what is occurring in the industry, and
- characteristics that contribute to it being reliant on particular people remaining in the business.
The valuation of a business can reduce particularly where there are drawn-out family law related disputes. This is because the property settlement (how the asset pool is to be divided), is determined based on the valuation of all of the property and assets at the point in time the agreement is finalised.
If the final valuation ends up being determined in a subsequent financial year and there has been an economic change, for example, the value of that business may have increased or diminished. Time delays, prolonged negotiations and disputes are contributors to additional valuations needing to be sought.
The Trajectory Risks
If a business has a strategic plan in play, or planned, that will effectively increase the business’ value, those plans may need to be put on hold until the property settlement process is formally completed.
When we discuss your goals, personal as well as business, we take into account what the risks are in both the short-term and the long-term. Along with your financial advisors we can determine what may be able to be achieved when we have the whole picture.
Separation and divorce can create financial instability for a business. That is particularly so if there aren’t other significant assets in the pool to divide easily. This is why seeking legal advice along with advice from your financial advisors is essential. The earlier the better.
The Personal Impacts
It is so much harder for people whose property settlements stretch across a number of financial years. Every year in the lead up to the end of the financial year, we experience an influx of people hoping to finalise their property settlements. This is typically because they become aware that allowing it to roll over into another financial year, often means having to continue to communicate with their ex or negotiate with their lawyer for another financial year until everything is financially wrapped up.
Because the financial disclosure elements of the process continue until an agreement is reached, or a Court decides for you, most people don’t like having to disclose their finances (personal and business) with their ex, particularly as the timeline extends. Once an agreement is formalised, there is no longer any requirement to continue to disclose financial information.
Consult with Specialist Advisors
The tax implications that can arise from the sale of property, if required, needs to be considered. We work closely with our clients’ financial advisors to ensure we are all on the same page. We take complexities like these into account, when providing advice about a property settlement where a business is involved.
While we can assist people to get their property settlement finalised in time for EOFY, the groundwork needs to have been done already. The impact on businesses, business partners and yourself can be significantly reduced when specialist advice is sought early on.
Having your financial settlement wrapped up within the first financial year is ideal where businesses are involved, so that business plans can proceed without the additional consequences that so often come with drawn out separation and divorce related disputes.
When answering the question, “What happens to a business in divorce?”, there are countless possible responses, none of which will give you more clarity than having a conversation with a specialist family lawyer. When our lawyers consider the unique circumstances of our business owner clients, they provide tailored advice that gives the clients clarity and confidence about their next steps, including what may impact them and their business. Give our team a call on (03) 9793 7888 or send us an email at admin@justfamilylaw.com.au.