Is your business at risk from your divorce?
Do you share a business with your partner? Apart from all the usual risks and challenges involved in running a business generally, when you share a business with your spouse, there are even more challenges. Whether or not a business is a separate legal entity (ie a partnership, company or an asset of a trust), the value of the business still forms part of your “matrimonial asset pool” and can be impacted by divorce.
But what if you don’t want to have to sell it off? How can you “divorce-proof” and safeguard a business you have worked so hard to build?
There are steps you can take pre-emptively to reduce the risk of a divorce impacting severely on your business. Obtaining advice from your financial advisor is of course crucial but here are some general tips from the experts that you might wish to consider, which can help protect your shared business, helping it survive and maintaining its value in the event of you going through a marital breakdown.
To help keep your business intact in case of divorce, you need to take certain legal steps and create a contingency plan for divorce in your company’s set-up.
Have a Prenuptial/post nuptial Binding Financial Agreement
A Binding Financial Agreement (BFA) can be created before you enter into a de facto relationship, during a de facto relationship, before marriage, during or even after a marriage. It is a private, legally enforceable contract setting out how some or all of the marital asset pool should be divided in the event of divorce.
As the name states, the agreement can deal with various financial matters, including how to value and distribute business assets and shareholdings. (It can also include provisions for self-managed super funds and normal super funds) Provided it is well-drafted, each party receives the mandatory legal advice and the agreement complies with the Family Law Act, it can give you and your spouse/business partner clarity and provide a framework for how the business will be protected if things go pear-shaped on the romantic front.
Obtain legal advice early on if your romantic partner starts to contribute to your business on an unpaid basis. Decide whether the business is solely yours and you retain it per a BFA, or whether your romantic partner starts to take on such a role that they end up having an ‘interest’ in the business.
In the absence of a BFA, obtain an appraisal of the business at the time you enter into your relationship, to allow appreciation of the business during the relationship to be established.
Structuring your business or business interest through a trust could provide an additional layer of protection, but make sure you speak to your financial advisor/accountant or other business advisors about the effectiveness of such a strategy in your situation.
Shareholders’ or Partnership Agreement
If you both own the business, your Shareholders’ or Partnership Agreement can set out how the business is to be handled in the event of divorce, and how both parties’ interests are to be protected. For example, there may be clauses restricting a departing spouse from establishing a directly competitive business, poaching clients, or sharing confidential information. The agreement might also require the departing spouse to sell back their interest to the company (a “buy-sell provision”).
Give careful thought to ownership of the business
If the business is wholly spouse-owned, it will generally be treated the same as all other matrimonial assets. If you jointly own it with outside partners and shareholders, courts may be less inclined to take action that could possibly have an effect on the financial circumstances of third party owners and partners. However, note the Family Law Act gives judges wide powers to make orders affecting third parties and corporations. It is always wise to obtain specialist legal and business advice when your business and personal situations merge particularly if the family home is securing a business.
There are more useful divorce-proofing tips in this article or you might like to read our blog on what happens if your business partner goes through a divorce.
What if you didn’t consider the above preventative strategies?
Hindsight is a wonderful thing, and of course most of us don’t enter a marriage anticipating it could fail. What can you do if you didn’t address the possibility of separation and divorce, to salvage the situation? This is the ideal time to explore alternate dispute resolution processes to unravel the business and marriage in the least destructive way possible.
For example, during negotiations, you may be able to consider a trade-off of personal ‘liquid’ assets in exchange for the ‘illiquid’ ownership of the business.
If your business ends up in the courts being divided as part of your matrimonial asset pool, be aware the courts have wide powers to alter parties’ interests in assets, which include your business, with the aim of creating a “just and equitable” division. Even if they were not involved in your business, therefore, your ex may be able to make an ownership claim on it, and this can have a serious unforeseen impact on the running of the business.
To avoid disruption to your business, cashflow problems, loss of value, loss of assets, forced selling off, losing control, or even insolvency, it makes a lot of sense to take the route of alternate dispute resolution. At Alliance Legal Services we specialise in Collaborative Divorce, so give Canberra family lawyer Cristina Huesch or one of our other experienced solicitors a call on (02) 6223 2400. We offer a free, no-obligation first conference.
Please note our blog are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Legal Services.