Separation and your Business – what you need to know!
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 a 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 to consider are:
1. the ownership of the business;
2. the value of the business; and
3. the income generated by the business.
The first aspect that needs to be properly considered is the ownership of the business. Many 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.
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.
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 that.
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 such as goodwill and intellectual property 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 business valuer to put a price on the business for Family Law purposes. Selecting the right valuer, and knowing what information should be provided to them, are vital to ensuring that the valuation figure represents the true market value of the business. 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 for hiding your true financial position.
Having a Family Lawyer who understands commercial structures means that you can ensure that your property settlement is watertight when it comes to your business assets.
At Bateman Battersby we have a number of experienced Lawyers that specialise in Family Law Property Settlement matters including those where a business forms part of the asset pool. If you need help sorting out who gets what when a marriage or relationship breaks down, please call Oliver Hagen or Ken Gray on (02) 4731 5899 or email us at firstname.lastname@example.org if you require further information or assistance.