Going through a divorce is difficult. There is the emotional pressure from a family breakdown along with the stress from dealing with the financial impact of the divorce. If you’re a business owner, you’ll likely be wondering what impact the divorce will have on your business. Whether you run a small business or a large company, there’ll be similar questions going through your mind. What should you do with your business? Would you have to divide it up? Can you buy out your partner’s equity? Prior planning can offer your business some protection and lessen the disruption to business operations.
What can happen to your business if you divorce?
With divorce, your debts and assets, including your business, are usually divided between both partners.
There are a few ways a business can get split up between a couple:
- The business can be allocated to one partner while the other partner gets the same value made up of other family assets. For example, you might want to keep the business and is willing to forgo your share of the house for your partner’s equity in the business. Sole trader businesses based on the provision of skilled services usually remain with the owner who has the skill to run the business.
- One partner can pay for the other partner’s equity using the profits generated by the business over time. This method can relieve the financial pressure of coming up with a lump sum. Monthly payments can be made as the business continues to bring in revenue.
- One partner can buy out the other by taking out a loan.
- The business can be sold to external buyers and the sale amount divided between the partners. This option may be more suited to businesses that can operate independently of the owner.
Both partners can continue to operate the business together. This can happen if the business is the only asset and cannot be split up. Such an arrangement can last until either partner has enough money to buy out the other.
If you and your partner can agree on how your business gets divided, the process can proceed without any court intervention. However, things may not go smoothly and most families don’t have any backup plans. If an agreement cannot be reached, or there are other complications, such as a partner not willing to sell their share of the business, then the settlement will require court intervention.
The impact on your business
Unfortunately, divorce can be a time consuming and expensive process. You’ll likely be taking time off work to meet with lawyers and advisors, or organising paperwork required for the divorce settlement. It’s inevitable your business will face disruptions during the separation process. You’ll find yourself juggling different responsibilities that draw your attention away from your business.
Your employees can also find the situation challenging as they deal with the uncertainty of their job. Low morale amongst the staff can reduce productivity and service effectiveness. This can ultimately impact customer relationships and business reputation.
How to protect your business
The best protection for your business starts before marriage. Before you get married, consider setting up a prenuptial agreement on how to valuate and divide assets in the event of divorce. The agreement can still be challenged, but it will add a layer of protection for your business.
Here are some actions you can take to protect your business even if you are happily married:
- Set up a buy/sell agreement that lays out the terms regarding how your business will be valued, transfer of ownership, and the rights to buy the business at a set value.
- Set up the business in structures that offer some protection such as using a company or unit trust.
- Keep accurate financial records. It makes financial disclosure easier.
- Keep your family and business expenses separate.
Appropriate planning can reduce the negative impact of divorce on your business. This should be done well in advance of any talks of separation. Contact Moiler to discuss the best ways to protect your business now and into the future.
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This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 8 July 2019.