Business assets include both physical and non-physical items, which are owned by a company and have some form of economic value. These assets can include things like equipment, inventory, vehicles, cash, property, stocks, trademarks and patents.

If you own a business and are currently going through a divorce, you will naturally be concerned about the ownership and division of your business assets, especially since business assets are usually the result of years of hard work and dedication.

A separation lawyer’s job is to protect your business interests and assets.

Why Do Business Interests Complicate a Separation?

Businesses are usually made up of complex and numerous assets, which naturally complicate a separation.

Some of these complications include:

Valuation Issues

Business assets do not always have a fixed value, unlike property or homes. A specialist is often required to value a business.

The value of assets is usually based on the following factors:

• Assets and liabilities: Consists of both tangible and intangible items. Non-physical assets typically drive value, although they can be hard to quantify. Physical assets need to be adjusted from book value to market value.Liabilities include any debt, such as taxes, employee entitlements, and accounts payable.
• Revenue and profit: Revenue refers to the total money that is generated from a company’s sales, while profit is the leftover income after taxes and other expenses.
• Goodwill: A non-physical business asset that represents a company’s brand image, customer loyalty, reputation, and intellectual property, which is often difficult to measure and exceeds its net tangible assets.
• Industry conditions: A company’s business assets are directly linked to industry conditions and market trends, which can affect its profitability, reputation, and brand image.
• Future earning potential: Refers to the predicted future economic benefits that various resources can provide for your company over time.

Cash Flow vs. Asset Value

Cash flow determines a company’s ability to generate cash (liquidity). The asset value refers to the total value of the resources a business owns (both physical and non-physical).

Cash flow is used to assess a business’s growth over time and to analyse the success of its day-to-day operations, while the asset value is used for business loans or valuation.

Third-Party Interests

Having third-party business interests can complicate the valuation and division of business assets in a divorce. Lawyers and the courts may order third parties to submit financial records and hire a forensic accountant to disclose their findings before reaching a decision regarding business assets. It’s important to note that the rights of third parties are always taken into account.

Third parties can include:​

• Business partners
• Family members
• Creditors
• Lenders
• Suppliers
• Manufacturers
• Service providers
• Consultants

Is the Business Automatically Split 50/50?

No, businesses are not automatically split 50/50 between both parties during a divorce. Under the Family Law Act (1975), the Court follows the guidelines set out by the Federal Circuit and Family Court of Australia, which always determine a fair division based on each party’s financial and non-financial contributions, their financial needs, and the length of the marriage.

How Courts Approach Asset Pools

In Australia, the courts approach asset pools using a four-step process set out in the Family Law Act 1975.

This process consists of the following steps:

• Identify and value the asset pool: The court identifies all assets, liabilities, and financial resources (superannuation) owned by each spouse.Assets are valued by subtracting liabilities from the total assets.
• Evaluate contributions: The court analyses both direct and indirect contributions to marriage, including financial contributions (income and inheritances) and non-financial contributions (maintenance of assets and homemaking).
• Consider future needs: The division is determined by various factors, including the age, health, custody arrangements, lifestyle and financial situation of each party.
• Ensure a just result: The court ensures that the division is fair and justifiable.

Contributions (Financial and Non-Financial)

The Federal Circuit and Family Court of Australia analyses each party’s financial and non-financial contributions to determine a fair division of assets.

• Financial contributions: Income, inheritance, investments and windfalls.
• Non-financial contributions: Childcare, property maintenance, homemaking, and home renovations.

Business Valuations

Business valuation is necessary for the fair division of assets between both parties, and is usually conducted by an independent financial expert. It involves the valuation of any income, profits, assets, liabilities, inheritances, and investments that have been accrued by each partner.

Independent Valuers

Independent valuers are hired to better determine the division of assets between both parties. They may study tax returns, financial statements, contracts and debts.

Important aspects of an independent valuer include:

• Unbiased: Independent valuers must be impartial, so that their financial reports and findings can ensure that the division of assets is fair, and not in favour of one party over another.
• Assets that are valued: A valuer analyses property (residential, commercial and holiday properties), businesses, vehicles, inheritance and investments.
• Compliance with the court: A valuation report needs to meet the requirements of the Federal Circuit and Family Court of Australia under the Family Laws Rules 2021.
• Used by both parties: The same valuer is usually used by both parties to save money and to ensure that all the information presented is accurate and unbiased.
• Valuer reports: The financial reports prepared by the valuer are used during negotiations, mediation and in any court appearances to prevent potential conflicts.

When Valuations Are Required

Valuations are required when:

• Complex business assets: When there are mutual business interests, trusts or superannuation funds.
• Property disputes: When both parties can’t come to an agreement on the current market value of the family home, commercial properties or investment properties.
• Asset retention: One party may retain a jointly owned asset that needs to be valued so the other party is paid the correct and fair amount.
• Used as evidence in court: A valuation report is used as evidence in court and litigation.
• Special items: Unique items, such as antiques or special collections, will likely require valuation.

Protecting Business Continuity

A divorce can cause disruption to your business, which is why it’s crucial to put certain actions in place to ensure that your business keeps running smoothly during this upheaval.

Structuring Settlements

For more complex or high-value businesses, a settlement is structured in such a way that disruption to the daily running of the businesses is kept to a minimum.

Offsetting Against Other Assets

Offsetting against other assets is used to balance the division of assets when one party keeps a large asset (a business or house), while the other party receives a mix of smaller assets that equal the value of the large asset.

This allows a fair division of assets between the parties without threatening any business or disrupting day-to-day activities.

Payment Arrangements

When it comes to businesses, there are more structured payment arrangements to reflect the complexity of business assets.

Common payment arrangements for businesses include:

• Buy outs: One party keeps the business and pays the other party for their share.

• Sale of business: The business is sold, and the profits are split between both parties.

• Share transfer: Ownership shares are transferred to one party, which is reflected in formal documentation.
• Instalment payments: If a once-off payment can not be made, the court may agree for the buy-out amount to be paid over a certain period of time, sometimes with added interest.
• Asset substitution: One party keeps the business, while the other party receives a large share of different assets to balance out the division.
• Deferred settlements: The division of assets (such as the family home or business assets) is postponed to another agreed-upon date in the best interest of both parties.
• Refinancing: Replaces a joint mortgage or business ownership with ownership by one party.

Early Steps Business Owners Should Consider

The smartest things a business owner can do in the event of a divorce are to take the following steps:

• Get advice early: The legal process of divorce is complex, especially when you and your spouse have multiple assets that need to be split.Getting early legal advice can reduce the risk of costly mistakes and clarify any obligations and decisions that need to be made. It ensures that you go into your legal appointments feeling prepared and not too overwhelmed.
• ​Maintain detailed records: Being organised and having all your documents clearly labelled and up to date can help you remember important information and ensure that you have all the necessary information on hand when asked for it.Incomplete or disorganised documentation can increase your legal costs, drag out the divorce process and may also raise suspicions.

Ensure that you have the following documents on hand:

• Balance sheets
• Bank statements
• Loan agreements
• Tax returns
• Profit and loss statements

Avoid Asset Transfers

You might think that transferring business assets to family or friends is the best action to take, but it can seriously damage your reputation and cause the court to look at you negatively, and increase legal scrutiny.

Being transparent about your financial situation and the financial decisions you make is always the best approach.

Common Mistakes Business Owners Make During Divorce

Some of the common mistakes and risks business owners make during the divorce process often stems from mixed emotions and high stress levels, but these mistakes can prove risky in the long run, so make sure you avoid the following:

• Mixing both personal and business assets
• Letting emotions get in the way of clear thinking
• Relying on informal agreements
• Undervaluing your business
• Ignoring superannuation
• Delaying disclosure
• Providing false or misleading financial information  

Why Does Specialist Advice Matter in Complex Matters?

The legal landscape is vast and filled with confusing terminology, complex laws and regulations and detailed documentation. Add business assets to the mix, and things get even more complicated.

Hiring divorce lawyers can help in the following ways:

• They can coordinate with accountants
• They ensure that your business continuity is protected and stable
• They organise workable and fair settlements
• They can anticipate financial risks
• They ensure that your rights are protected and heard

Conclusion

Meredith Family Lawyers strongly recommends getting early legal advice to avoid costly and irreversible mistakes that will cost business owners time and money, adding to their stress levels and anxiety.

Rushing into the divorce process without any background information or professional advice will not result in you getting a better settlement or a larger share of business assets. Instead it might cost you more money, and cause you to be looked upon unfavourably by the courts.

Preparation, organisation and transparency are the best paths for all business owners to follow and will ensure the best possible outcome for your business and all parties involved.