The life of a business owner involves long work hours, travel and utilising all resources (time, energy, money etc.) to grow their business. It is no wonder that the combination of these factors can cause as strain on relationships and in some cases, results in separation.
Separation is never easy, but it can be even more difficult for business owners. This is because business owners have the added uncertainty of having their jobs (and often livelihoods) tied up in a business that is considered an asset of the relationship. For many business owners, the most daunting aspect of their separation is the possibility of losing their business.
There are several special issues faced by business owners which require early intervention and strategic advice in the context of a separation or divorce. The three main issues are the ownership of the business, the value of the business and the income generated by the business.
The first aspect that needs to be properly considered is the ownership of the business. Most businesses are operated through an entity (such as a company or a trust), and larger businesses are often comprised of a whole interwoven structure of entities. It is important that the business structure and underlying ownership is kept in mind when discussing a property settlement as it may give rise to liabilities or benefits, including tax, going forward.
We can help because we understand businesses and how and why they are structured. Having a family lawyer who understands commercial structures means that you will ensure that your property settlement is watertight when it comes to your business assets.
It is also not uncommon for third parties to be involved in a business, either as active business partners or investors. Putting the business under the microscope during a separation can cause serious issues to your relationship with your partners or co-owners, which often has flow-on effects to the operations of the business. As part of the family law process, it will be necessary for your lawyer to review any agreements between you and your business partner or co-owners, including any shareholders’ agreements, partnership agreements, owners’ agreement, unit holders’ agreements or buy-sell deeds. This is because these agreements may contain terms that stipulate how the business is to be dealt with and valued in the event of a relationship breakdown of one of the owners.
If you are considering a separation, we can help you to discuss buy-sell options with your business partners. Alternatively, if you are already going through the family law process, we can help you manage your relationships with your business partners to keep the process smooth and avoid disruption to the business.
It is difficult to determine the true value of a business. Business owners may inflate the value of their business to attract investment but underestimate the value for tax purposes. However, it is necessary to put a value on a couple’s asset pool to work out a property settlement, and a business often forms part of the pool.
Most new businesses are worth very little and may in fact be more of a liability in their early stages. Where a business is more established, issues may arise around the valuation of goodwill, plant and equipment and intellectual property. Usually the intangible assets are harder to value because their worth is more subjective and more vulnerable to industry conditions and fluctuations in the economy.
Typically, it will be necessary to obtain a valuation report from an independent valuer to put a price on the business for family law purposes. Selecting the right valuer, and knowing what to say to them, are vital to ensuring that the valuation figure represents the true market value of the business.
We can help by guiding you as to the best valuer to value your business, and by properly briefing them to ensure they consider all relevant factors in reaching their value. For example, your business may have some expected or deferred liabilities that are not reflected in the balance sheet but should be taken into account. Or some changes to the market or to your customer base may mean that you are expecting a downturn in your business revenue or profits that will significantly impact its value.
Cash flow is an issue for almost every business owner. But business income can be difficult to deal with during a separation, especially when an owner’s income is tied to the profitability of their business.
Businesses in the start-up phase will typically have patchy and unpredictable revenue. As such, their owners will often not pay themselves from the business or only pay themselves the bare minimum amount at least until the business gets off its feet. The payment of child support or spousal maintenance can therefore be difficult to work out.
Income can also come in many forms. Bonuses, tips, commissions, rental income, interest, dividends and distributions are types of income that business owners may receive. It can be tempting to conceal your true income during a family law dispute. However, the duty of full and frank disclosure is imposed throughout the family law process and there can be serious consequences of hiding your true financial position. We can advise you about the best approach to take in dealing with and disclosing your income position during a separation.
Summary of how we can help
If your business is your livelihood, we can help you protect your business during a separation by:
- Understanding your business ownership structures to ensure they are properly dealt with in any property settlement terms;
- Helping select and brief the right valuer to get the most accurate valuation of your business;
- Understanding your key business pressures and liabilities, which are likely to affect your business’ value;
- Assisting you and your business partners to plan for any impending separation, including preparation of a Buy-Sell Deed between owners; and
- Negotiating on your behalf to ensure you retain control and ownership of your business and its associated entities through the separation.