Divorce and Dividing a Business Asset in Australia

Divorce and Dividing a Business Asset in Australia

For many Australian couples, business and pleasure are in fact mixed, with entrepreneurial spirit thriving, lots of couples run businesses together, whether these are start-ups, small businesses, local businesses or multinational companies. Separating the finances of a business, whether large or small, can be very tricky, but there are some common points that a person tackling divorce and dividing a business asset should note.

Some aspects may be jointly owned, others owned or in the name of only one spouse, and working out an equitable division of the business, or another solution takes place in the divorce property settlement. A property settlement is often necessary for the divorce process as two people begin their separate financial lives. It involves working out the value of assets and liabilities jointly or solely owned by the parties, and also takes into account non-financial contributions made to the relationship, such as primary parenting and maintaining the home. The property is then divided equitably to meet each party’s entitlements. Businesses are treated as property under family law, although divorce and business are not always so simple.

The value of a business is included in the property settlement just like any other asset, such as the family home. What makes divorce and business more difficult, however, it can be incredibly hard to calculate the value of a business. If the two parties cannot agree on the value of their business, then reaching a fair property settlement is even harder.

If a property settlement cannot be agreed upon, either because of a disagreement on the business value or because the parties’ expectations are not being met, the case will go to the family court. Here, in order to meet the entitlements of both parties in the property settlement, the court may order the sale of the business.

This is not the only possible outcome. For two spouses running a business together who then divorce, there are many possible solutions. Ex-spouses may continue to manage their business together, one spouse may sell their share of the business while the other stays, they may rearrange business operations to facilitate a professional relationship, one spouse may choose to have a smaller role in the business, or it may be sold off completely.

To reach an agreement on the value of the business and therefore make the division of assets easier, one or both spouses, or the Family Court, may appoint an independent valuer. The independent valuer has the responsibility to provide an accurate estimation of the business value, without any bias or partiality. The estimated value that the independent valuer calculates is usually not the value of the business if it were to be sold but rather the business’s monetary value to the owner and what sorts of benefits and profits they could expect to receive if they maintained the enterprise.

There are different ways to approach a business valuation depending on the size and type of business, but the valuer will likely take into account:

  • The stability of the earnings
  • Whether the business has stopped or is continuing operations
  • Estimations of future cash flow
  • Estimations of profits if the business were to be sold

 

An independent business valuation brings clarity to the property settlement proceedings and may be used in court to establish each party’s entitlements for a fair division of assets.

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