02 Aug Divorce and Business
Divorce can be hard enough without it involving your business and livelihood. For many Australian couples, divorce and business mix, and this leads to big questions and big decisions about the business they run.
Lots of people run businesses, whether these are start-ups, small businesses, local business or multinational companies.
The entrepreneurial spirit is thriving, and a business is often part of a marriage if a couple founds or directs an enterprise together.
If two people in business together are in a relationship and then decide to separate or divorce, what implications does this have for the business they run?
The answer to this question is different for everyone: every divorce and business, just like every marriage and relationship, is different.
But there are some common points that a person tackling divorce and business with someone else who is about to become their ex-spouse needs to pay careful attention to.
Seek Legal Advice
Because every situation is different, it is hard to know the likely outcome or the best result for you and your business without seeking professional legal advice.
Contact a lawyer as early as possible so you can learn what to do and what to expect and obtain advice about approaching divorce and business before taking further action.
A major complexity in a divorce is establishing financial independence as well as emotional independence of another person.
Separating the finances of a business, whether large or small, can be very tricky.
Some aspects may be jointly owned, others owned or in the name of only one spouse, and working out an equitable division of the business, or another solution, takes place in the divorce property settlement.
A property settlement is often necessary in the divorce process as two people begin their separate financial lives.
It involves working out the value of assets and liabilities jointly or solely owned by the parties, and also takes into account non-financial contributions made to the relationship, such as primary parenting and maintaining the home.
The property is then divided equitably to meet each party’s entitlements.
Businesses are treated as property under family law, although divorce and business is not always so simple.
The value of a business is included in the property settlement just like any other asset, such as the family home.
What makes divorce and business more difficult, however, is that it can be incredibly hard to calculate the value of a business.
If the two parties cannot agree on the value of their business, then reaching a fair property settlement is even harder.
If a property settlement cannot be agreed upon, whether because of a disagreement on the business value or because the parties’ expectations are not being met, the case will go to the family court.
Here, in order to meet the entitlements of both parties in the property settlement, the court may order the sale of the business.
This is not the only possible outcome.
For two spouses running a business together who then divorce, there are many possible solutions.
Ex-spouses may continue to manage their business together, one spouse may sell their share of the business while the other stays, they may rearrange business operations to facilitate a professional relationship, one spouse may choose to have a smaller role in the business, or it may be sold off completely.
Some people might find managing divorce and business easier than others.
There is no right answer and no easy prediction.
To reach an agreement on the value of the business and therefore make the division of assets easier, one or both spouses, or the Family Court, may appoint an independent valuer.
The independent valuer has the responsibility to provide an accurate estimation of the business value, without any bias or partiality.
In court, they have the role of a single expert witness, someone who provides the court with more information about the case in question.
The estimated value that the independent valuer calculates is usually not the value of the business if it were to be sold but rather the business’s monetary value to the owner and what sorts of benefits and profits they could expect to receive if they maintained the enterprise.
There are different ways to approach a business valuation depending on the size and type of business, but the valuer will likely take into account:
- The stability of the earnings
- Whether the business has stopped or is continuing operations
- Estimations of future cash flow
- Estimations of profits if the business were to be sold
An independent business valuation brings clarity to the property settlement proceedings and may be used in court to establish each party’s entitlements for a fair division of assets.
The Family Farm
A farm is one type of business that brings further complications with it.
Divorcing and then working out what to do with the family farm can cause many problems, ranging from professional to financial to emotional.
Acquiring a farm may be a little different from acquiring another sort of business if the farm was inherited.
Because of this, the property may be in one party’s name but not the other’s, while other parts of the farm may be owned jointly or by the other party.
Another complication is that, for many people, running a farm results in being asset rich but income poor.
Therefore, the question of how to divide property is not an easy one.
The court will assess the contributions each party has made to the maintenance and management of the farm, just as they would assess the contributions made to any other type of house, and establish each spouse’s entitlements in the property settlement.
In order to be fair and equitable and provide a spouse with their entitled financial settlement, the court has the authority to order the sale of the farm.
The issue of divorce and family businesses comes up quite often in cases heard by the Family Court.
The following cases are examples of how a property settlement can play out.
The case of Calder & Calder, heard in Melbourne in 2014, involved a property settlement at the end of a marriage that had lasted 33 years.
The matrimonial asset pool comprised major farming properties known as Property A and Property C, plant and equipment, crops, machinery and livestock owned by the Calder and Co Farming Partnership and a fund named the Calder Family Trust.
The couple’s assets were worth over $13,000,000.
The wife sought a property settlement in which the Calder Family Trust and the assets owned by the farming partnership were divided equally.
She wanted to retain Property C, while the husband would retain Property A.
The husband had acquired the farm before the couple were married and made a significant initial contribution, however, the wife made significant contributions as a homemaker.
The court assessed the contributions each party had made as well as the value of the assets.
The final order was for a 55/45 division of property in favour of the husband, with an equal division of plant, livestock and equipment.
The parties Ms King and Mr Hamidou were married for 14 years and operated a number of businesses.
The most successful was an enterprise known as the D Business, which became the subject of the property settlement.
Both parties wanted to retain their interest in the D Business and be solely entitled to it, including related bank accounts.
In order to resolve the property settlement fairly, the court considered financial and non-financial contributions, both direct and indirect, made by each party.
The value of the business, as the asset both parties wished to retain ownership of, was very important.
Ms King engaged an independent valuer, known as Mr E, who valued the business at $3,800,00.
Mr Hamidou submitted his own value of the business, $4,200,00.
Ms King and Mr Hamidou had described the business as “the gold mine” and “the jewel in the crown.”
Assessing the parties’ post-separation contributions was important in this case.
The wife maintained responsibility for the business and had been operating it very successfully, returning the business to profitability since taking responsibility for its financial management.
The judge adjusted the asset pool to 52.5 per cent in favour of the wife and 47.5 per cent in favour of the husband.
Orders were made for the wife to retain ownership of the D Business.
The wife was to pay the husband $1,299,740.50 within three months of the date of the orders.
If she failed to do so, the husband would take ownership of the business.
Further considerations must be made when the business is owned solely by one spouse, as in the 2017 case of Martinelli & De Luca.
The parties, Mr Martinelli and Ms De Luca, were in a de facto relationship and Mr Martinelli operated a business in which the wife had been employed.
The court found that although the wife had misappropriated finances from the husband’s business, she had made greater contributions to the parties’ assets.
The property settlement was made in favour of Ms De Luca.