Divorce – what it means for your business

Going through a separation or divorce is arguably one of the most stressful times any individual may have to go through and is often accentuated where there are children involved.

A further stress point is when a family business or interest in a business or company forms part of the asset pool of the parties.

Even before family law negotiations or proceedings commence, an impact to “business as usual” is likely given the emotional and possible time impact of those involved in the family law process. The repercussions may go beyond the individual and may impact shareholders, fellow business partners and the business itself.

The size of a business or company will unsurprisingly have a direct correlation to the impact on the turnover or value of the business itself during or after the time an owner, Director or significant shareholder goes through or leaves the business due to a breakdown in their relationship. The smaller the business or company, the more of an impact will likely be felt within the business due to a divorce or relationship breakdown. However, in larger companies, where there are more employees to share the burden and cover for lost time for specific individuals, the smaller the impact is likely to be.

However, where a spouse (or both spouses) own a business with third parties, the impact on other business partners may result in added complexities in family law proceedings, given the obligations on each spouse to provide full and frank disclosure of their assets to the other, spouse which, with respect to businesses, needs to be sufficient to determine its relative value.

The obligation of disclosure is both significant and ongoing.  Due not only to the burden of compliance but the concern about business financials being shared, other business partners may have concerns about doing so in the first place, which in turn can result in complexities and/or delays in the family law proceedings.

Methodologies used in business valuations

In some instances, parties are able to agree on an attributed value to a business.

However, in most instances, value is one of the issues in dispute between the parties.  As a business is often an income generating asset of the parties, independent and jointly instructed business valuations will often need to be undertaken by the parties (via experts) to determine the value to be attributed to the business so that the property pool available for distribution between the parties can properly be identified.

There are a number of methodologies that can be used to determine the value of a business. For example, businesses can be valued based on:

  • A capitalisation of estimated future maintainable earnings;
  • A capitalisation of estimated future maintainable dividends;
  • The net present value of projected cash flows; or
  • Net asset backing.

Which methodology is used will be dependent on the particular circumstances of the case – but can often be a further point of contention between the parties.

Can we both keep the business?

Where spouses are in partnership with one another, or run a relatively small business together, typically one spouse will retain the business interest, shareholding or business generally while the other one exits.

While this is often for practical reasons – i.e. the difficulties associated with continuing to work effectively and professionally with an ex-partner in a business post-separation – the court also has an obligation to ensure that the Orders it makes ends, as far as possible, the financial relationship between the parties to avoid further proceedings between them.

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If you have experienced a relationship breakdown and are concerned about the impact on or the value of your business in the proceedings,  the team at Damien Greer Lawyers are able to give you advice along every step of the way, including but not limited to helping you understand how your business will be affected, what obligations you have with respect to disclosure, and how to determine the value of your business for family law purposes. Using a qualified legal firm will help buffer some of the emotional toil of divorce and will also help you manage how much time you need to dedicate to legal proceedings, thereby allowing you to continue focusing on your business.

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