What hap­pens when divorce splits a busi­ness? — Six pos­si­ble scenarios

In brief

Many busi­ness­es are found­ed and run by a hus­band and wife team. What hap­pens to the busi­ness if they divorce?

The ​‘clean break’ principle

The Fam­i­ly Court’s posi­tion is that when­ev­er pos­si­ble, there should be a clean break between ex-spous­es. This means a prop­er­ty set­tle­ment, with the com­bined asset pool being bro­ken into two chunks. When the assets include a busi­ness, the prop­er­ty split can take place in a num­ber of ways.

• Val­ue of the busi­ness is off­set by oth­er assets

The best sce­nario is when there are addi­tion­al assets to be divid­ed. For exam­ple, if the busi­ness is val­ued at $500,000, there is oth­er prop­er­ty in the asset pool with rough­ly the same val­ue and the court deter­mines that the appro­pri­ate divi­sion is 50/50, it’s easy to do a straight swap or split.

• Prop­er­ty set­tle­ment from com­pa­ny prof­its over time

Obvi­ous­ly, for this to work, the com­pa­ny has to be prof­itable. Sec­ond­ly, there needs to be an ele­ment of trust between ex-spous­es, because if only one of them is work­ing in the busi­ness, the oth­er can’t nec­es­sar­i­ly gauge whether the prof­it on the books is correct.

Lawyers can pro­vide for cer­tain dis­clo­sures, such as the books being checked by an inde­pen­dent accoun­tant. You also need fair and ade­quate default pro­vi­sions, so that if the agreed instal­ments are not paid, then and only then is the busi­ness sold.

• Bor­row­ing mon­ey so one spouse can buy out the other

This is pos­si­ble if the company’s assets are suf­fi­cient­ly valu­able for a finan­cial insti­tu­tion to accept them as security.

• Sell­ing the busi­ness on the open market

Clear­ly, if the com­pa­ny makes a good prof­it, owns valu­able intel­lec­tu­al prop­er­ty or has sub­stan­tial assets (build­ings or land), it has a bet­ter chance of a suc­cess­ful sale than if it doesn’t. Ide­al­ly, the busi­ness should be at arm’s length to the pro­pri­etor, have good gov­er­nance, employ qual­i­fied man­agers and have a clear struc­ture of responsibilities.

An SME run­ning a sys­tem of pro­duc­tion or man­u­fac­ture is more like­ly to be attrac­tive to buy­ers than a pro­fes­sion­al ser­vices com­pa­ny where the good­will is attached to the proprietor.

• Bring­ing in anoth­er investor

If the com­pa­ny’s prof­its are to be paid to the proprietor’s for­mer spouse instead of being rein­vest­ed in the busi­ness and there is a risk that the com­pa­ny will be sold in the case of default, it’s unlike­ly that you will be able to attract an arm’s length investor. How­ev­er, an inter­est­ed rel­a­tive like a par­ent or new spouse may be pre­pared to help out.

• Both peo­ple con­tin­ue to oper­ate the business

This can hap­pen when it is in the inter­ests of both peo­ple or there is no prac­ti­cal alter­na­tive, because the busi­ness is their only asset and it can­not read­i­ly be carved up.

In some instances, cou­ples have used con­sent orders in the Fam­i­ly Court almost as a con­sti­tu­tion of the com­pa­ny, set­ting out how they will del­e­gate tasks and man­age affairs into the future. I’ve seen oth­er instances where employ­ment con­tracts for the hus­band and wife have been incor­po­rat­ed as an annex­ure to court orders. This is very rare and usu­al­ly only tem­po­rary, until there are suf­fi­cient funds for one spouse to buy out the other.

Know when it’s time to move on

Ulti­mate­ly, suc­cess­ful busi­ness­es are built on suc­cess­ful rela­tion­ships. Cou­ples who have sep­a­rat­ed or divorced are not like­ly to be ide­al long-term busi­ness part­ners, no mat­ter how civ­il their break-up was. And if you can no longer stand the sight or sound of the per­son who used to be your life’s part­ner, it’s best to pack up your kit bag and move on. Just make sure that you look over the edge and plan your land­ing before you jump.

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