If you own a business, you could lose part of it, or even all of it, in a divorce. Any growth in the value of your business that occurred during your marriage could be considered up for grabs as part of the marital pool of property, and therefore subject to division with your ex-spouse. This is true no matter whether you and your spouse worked closely together for years to make the business a success, or whether you’ve put it all the hard work yourself.
Under family law, the court has broad powers to make orders altering the interests of parties in assets, including businesses, as it considers “just and equitable”. This requires the court to identify and assess, among other things, the parties’ assets and financial resources, the parties’ contributions to their assets and likely future needs.
This means that your ownership interest in a business may be exposed to the claims of your former spouse or partner. This in turn may lead to a significant disruption to the business, loss of business value or assets, a forced sale, loss of control and cash flow or insolvency problems.
When you have to go to court, you may be forced to divulge details like the financial statements and tax returns over the last five years, the company’s investment plans, its product mix, channels of distribution and markets, its forecasts for the future, details of distributions to shareholders, its banking and lending relationships including details of all the loans and details of compensation. All is sensitive information that you probably don’t want your friends, let alone your competitors, to know.
Is there are way to divorce proof your business?
How To Divorce Proof Your Business
The family business can be protected if it is placed in a company or a unit trust where the trust’s interests are fixed and held in accordance with the units, much like shares in a company. The individual family members have their interest in that company held through a discretionary trust.
A simple example is that you have four family members with each holding 25 per cent of the units. If a divorce looms, the ex-spouse can get their 25 per cent interest but cannot interfere with the conduct of the whole business.
Value The Business
If the business exists prior to your relationship, make sure you get it valued. You should consider how the business will be valued. The key here is to get an agreement first off between all the parties on how the business should be valued by an independent expert at the relevant time. So a valuation expert is brought in to appraise the business in an impartial manner.
Sign Binding Financial Agreements
A Binding Financial Agreement (also known as a prenuptial agreement) is a written legal agreement between spouses-to-be, setting forth (among other things) what would be considered their own separate property in the event of a divorce. It must be executed before witnesses, voluntarily, without coercion, and with full financial disclosure. Each party must have their own legal representation, and the agreement can’t be “unconscionable” (too lopsided).
If it is too late for you to sign one prior to marriage, you can sign one during or after marriage to which the same conditions apply. There is no specific guarantee that these documents will provide complete protection, but they’re better than nothing at all.
Keep Business & Personal Finances Separate.
Make sure that your business and personal finances are clearly separated. That means no commingling of personal and business finances and assets; don’t buy that new shiny car as a “business expense”. Try to limit the personal expenses you pay through the business and don’t borrow from your personal accounts or personal assets to fund the business.
Consider Buy-Sell Agreements
In the case of a divorce, ownership status may change. With a buy-sell agreement it could prevent your spouse from acquiring ownership.
Sacrifice Other Assets
In the event of a divorce, sacrifice other assets — home, vehicles, property, etc. — to keep the business going. It’ll probably eventually be worth more than your car.
In the end, the best way a family business can cope with the unthinkable event of a divorce is to plan for it. Even then, it’s not fool-proof. Divorce can still destroy a business. But the parties would still be better placed to deal with it by having a strategy.