How to save your family business following a marriage breakdown

The following article published on the 3 August 2015 on smartcompany.com.au by Glenda Laurence looks at the impact on divorce on family business and how to reduce the financial impact. For Family Law questions please feel free to contact our knowledgeable staff 03 9620 0088 or email info@resolveconflict.com.au

 

Many family businesses are unnecessarily destroyed by the breakdown of the owners’ marriage – particularly when the separated couples have worked together in their business.

Statistics highlight why husband-and-wife owners of family businesses cannot ignore the possibility that their personal relationships may unfortunately fail sometime in the future.

ABS divorce data suggests that more than 40% of marriages fail while RMIT University research has found that spouses are involved in more than a third of Australia’s family-owned businesses.

Family lawyers generally advise their clients to sever their financial relationship with the other spouse and separate their assets when negotiating a property settlement.

This advice is given because the Family Law Act provides for what is known as the “clean break principle”.  In short, couples are typically advised under the principle to end their financial relationships in order to get on with their separate lives.

While advice to sever financial relationships is appropriate in the vast majority of circumstances, it can have devastating consequences for the future of a family business.

There are however, ways that separated couples can still continue to own and operate a business together – unless there is a high-level of conflict between them.

Here are seven critical questions to consider which may help prevent the failure or loss of your family business in the event of a breakdown of a marriage breakdown.

 

1. Is the business more valuable if kept intact?

Many family businesses are split as part of a separating couple’s property settlement. This can prove extremely costly in terms of lost value because businesses are often more valuable if kept intact.

Discuss with your professional advisers such as your accountant, financial planner and family lawyer the broad options regarding the future of your family business.

Think about whether you and your former spouse should continue to own the business together despite your marriage breakdown or whether you should sell the business and divide the proceeds. Your business adviser can offer various other solutions given the particular circumstances.

 

2. If we decide to keep owning the business together, who should manage it?

The management choices may include: the estranged couple continuing to manage the business together; the spouse with the more hands-on involvement in management taking over full management; the appointment of your adult children from your relationship to work in the business or the appointment of an outside manager.

If one spouse has been successfully running the business prior to separation then it may well make sense for this arrangement to continue. Speak to your accountant or other business advisers.

 

3. Can I really share day-to-day management decisions with my former spouse?

This is a fundamental question many former couples face when they have owned and operated a small business together. As you no longer share your personal lives, sharing an office every day may be too challenging. Sharing ownership, however, can be a different matter.

 

4. What formal arrangements should be put in place if we are to continue to share ownership following our divorce?

Consult your business adviser/accountant about whether the business should be restructured in any way given the changed circumstances.

Also, take advice about what formal steps should be taken to ensure transparency and efficiency in any decisions concerning the ownership, the exchange of key business information and for the frequency of business meetings together.

And make sure both spouses receive equal access to information regarding the business – if they decide to remain joint owners. Discuss how this will happen and set guidelines for how this will be achieved. Typically, it will be much more straightforward and less stressful to agree on these details in advance.

With continued shared ownership of the business, perhaps the bottom line is to try to remove emotion from any decision.

 

5. Should I appoint my own professional advisers?

Decide whether you should retain your own advisers rather than continuing to have a common accountant and/ or financial planner with your former spouse.

 

6. What should I do if the family business premises are owned by our family self-managed super fund?

Many joint business owners, of course, also hold their business premises in their family SMSFs.

Even if one of the former spouses decides to sever his or her day-to-day involvement in the management of the family business, the business premises could remain an extremely worthwhile superannuation investment. Further, the continued use of the business premises could be crucial for the business’s survival.

Gain professional advice about what action to consider. There are several strategies intended to ensure that the family business retains use of the premises. The particular strategy should much depend on a couple’s personal circumstances – including the extent of their super and non-super assets.

 

7. Are formal exit strategies in place to allow one of the spouses to later leave the business or to pass on their share of the business to a child?

An exit strategy should be critical to any decision by separating owners to continue operating the business together after the breakdown of their marriage.

If you cannot agree with your spouse about this now you are unlikely to do so in the future.  Also, take legal advice about ensuring your will reflects your decision to keep operating the family business together. Your will should make provision for your interest in the business to be passed on to your beneficiaries with the opportunity for your former spouse to acquire your share of the business from your estate.

For more articles please visit the Resolve Conflict Blog here. If you have any queries on Family Law or Mediation please don’t hesitate to contact us on 03 9620 0088 or email info@resolveconflict.com.au