Divorce with business partners: when spouses co-own a business

This guide outlines people’s options when they are implementing a divorce with business partners who are also their spouse.

Almost 50% of marriages will end in divorce, and when a co-owned business is involved, you have to seriously consider how to treat it as an asset. Like a house or car, a business is considered to be an asset in family law property proceedings. When identifying assets during a separation, an interest in a business is one of the assets that will be given a dollar value which will form part of the pool of assets in which you must deal in divorce with business partners.

Divorce with business partners: What are your options?

If you own and operate a business with your former spouse and you have separated, there are a few options to cope with the impact of divorce.

1. You can continue to operate the business together for a set period of time but most of the time this creates more headaches and impacts the negotiations. Not to mention the need for a “clean break”, ending the financial relationship between you both; or
2. You can sell the business and divide the proceeds, but that may stop an otherwise successful business in its tracks; or
3. You can negotiate with your former spouse to retain the business and buy them out or vice versa. This is where the value of the business is crucial as it dictates what you pay your former spouse for the value of their share of the business.

How do you know which option is right for you?

Deciding whether to continue to operate the business together, organise a buyout or sell the business will come down to a number of factors. What do you want for the business? Is the business reliant on your skills? What will your financial situation look like if you sell or receive a buyout? Can you afford to buy out your former spouse? How do you manage a family law property settlement?

Working with a former spouse

It is possible to continue to run a business with your former spouse, but it’s unlikely to be smooth sailing and definitely not the preferred option.

It’s not a good idea to make the decision to continue running a business together simply to avoid the difficulty of a sale or buyout. Typically those issues will arise once again down the track when one party decides or is forced to exit. And in the meantime you’ll be forced to work with someone you don’t get along with.

In the short term of a divorce with business tie-ups, you may opt to work together for the interim pending a sale or transfer of shares pursuant to final settlement.

You should only decide to continue to operate the business together if you’re genuinely comfortable working together. The spouses that are likely to succeed in this despite their relationship breakdown will be those spouses who still have a lot of respect for and trust in each other. They know there will be challenges but they are committed to making it work for the good of the business and their respective interests. Usually there are separate business interests formed to reflect the division and partnership agreements are executed with the full understanding of each spouse’s rights.

Having clearly defined roles, developing ground rules for how to keep personal disagreements out of the workplace and putting in place formal structures to protect both parties will help make the arrangement more smooth. This may involve establishing a buy-sell agreement which sets out the terms for a sale if one party dies, is incapacitated due to illness or injury or wants to sell. You will also need to consider what happens if your former spouse remarries or has children with a new partner. To protect the business assets you may opt to use a trust.

Divorce with business: Negotiating a buyout

A buyout can be a complex and expensive process. If the marriage has enough assets to offset the value of the business then a simple ‘swap’ of cash and super assets can be arranged, but this isn’t always possible.

Selling the business

A sale can be a neater decision, but it may prematurely end your plans for the business which can take a big toll. It can also leave both parties worse off financially by cutting off a source of income and increasing expenses. Unfortunately you may have no choice but to sell, even if you don’t want to, to ensure an equitable division of assets.

Divorce with business: What challenges can arise?

If there is no agreement on the value of the business then the first step in divorce with business partners will be to get the business valued. This is where many people run into trouble. It can be very difficult to value a business and valuations may vary due to the methodology adopted by each expert including assumptions made based on their opinion.

In the case of a buyout in a divorce with business partners, one party will want the value to be as high as possible, while the other will want the value as low as possible. If the parties don’t agree on a value, they can be forced to sell, even if this is against their wishes. If the parties cannot agree on a valuer then the matter may go to Court and either an expert will be appointed by the Judge or an order for the sale of the business may be made.

The best thing you can do is to talk to your lawyer to determine a best case scenario and a plan of attack to make it possible.