What happens to a business in a divorce?

In a divorce or separation, the Court can make orders as it considers appropriate which alter the parties’ interests in their property. This is commonly known as property settlement orders.

The Family Law Act defines property in relation to the parties to a marriage or de facto relationship as property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion. This means that a business is considered as property which is relevant to a property settlement.

This can make owning a business feel particularly complicated if you are going through a divorce or separation. We are here to help guide you through the process.

How is a business treated in a property settlement?

A business is considered part of the wider net asset pool. The Court typically adopts a five-step process: it decides whether it’s just and equitable to alter the parties’ interests, identifies and values the net asset pool, assesses each party’s contributions and their current and future circumstances, and then checks that the outcome is just and equitable and ends the parties’ financial relationship.

You can find the 5-step process at the following link:

What am I entitled to in a separation?

Is a limited company protected from divorce?

A limited company is a separate legal structure and generally owns its own business assets. But that doesn’t necessarily mean the owner’s interest in the company is excluded from a property settlement.

To determine this, the Court will need to consider the following:

• the structure of the company and its ownership;
• the assets of the company;
• the shares/business interest owned by the individual;
• the wider property pool considered during a property settlement.

Can your spouse take half of your limited company?

There is no rule or law that your business will automatically be split equally just because it will likely be considered in the overall property settlement. The circumstances of your particular relationship, the structure of the business and the wider property pool will all impact whether your business is divided and how your business may be divided.

Similarly, there is no requirement that your business has to be divided at all as part of a property settlement. You can structure any overall division of assets so that you retain the business by offsetting the value against other assets. This will depend on the wider property pool that is available for distribution in your matter.

How is a business valued in a divorce?

The structure of the business and the type of business will inform what approach the expert valuer undertakes for the valuation. The most common approaches are the asset-based approach, the income approach or the market approach.

To determine the best approach, there are various factors that are considered by the expert valuer, as the value of a company isn’t necessarily the same as the amount of cash sitting in the company’s bank account.

These factors include but are not limited to the company’s:

• assets and liabilities
• profitability
• cash flow
• goodwill
• income
• dividends/distributions
• ownership and control
• future earning potential

It may also be the case that if you have a complex business, you will require specialist valuation and/or accounting input.

Does it matter when you started your business?

Yes, timing can be relevant, but starting the business before the relationship doesn’t automatically exclude it from a property settlement.

The Court will assess each party’s contributions to the business, whether direct (working in the business) or indirect (for example, taking on home duties so the other party can work in it). These are weighed against the other contributions made during the relationship.

If the business was established during the relationship, it is more likely to be included in the settlement, depending on how it was started and its structure.

How can you protect your business from divorce?

If you are considering a new relationship or getting married, then you can plan to protect your business in advance. You can do this through a Binding Financial Agreement (also known as a ‘BFA’), which can specify how your business is treated in the event of a separation between you and your partner. A BFA is a useful legal mechanism and can be tailored to the specific circumstances of your relationship. However, it does not guarantee that every future dispute will disappear.

It would also be useful to:

• Keep company and personal finances separate, as intermingling the finances can make it difficult to separate later on.
• Maintain clear business records.
• Obtain legal advice before entering a new relationship or when your circumstances change.

What should you do if you’re separating and own a business?

• Understand your company’s ownership structure.
• Gather company and financial records.
• Identify the wider assets and liabilities of the asset pool.
• Consider whether an independent valuation is needed of the business.
• Avoid making significant changes to company ownership or assets without appropriate advice.
• Consider negotiation or dispute resolution where appropriate.

Talk to Watts McCray

If you own a business and are separating or considering divorce, understanding how your business interests may be treated can help you make informed decisions. Watts McCray’s experienced family lawyers can help you understand your options and work towards a practical property settlement.

Contact our team today!