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What Does Divorce Mean for Small Business Owners?

What Does Divorce Mean for Small Business Owners?

A divorce shouldn’t mean the end of your small business, but your business might still be at risk. Find out how to protect it here.

22nd February 2021
Reading Time: 3 minutes

Key points

  • Being organised is key when it comes to keeping your business going through a divorce
  • It’s important to maintain accurate records and be transparent in your dealings with your former spouse
  • Finding the right lawyer who will advocate for your interests is also key

Introduction

A divorce shouldn’t mean the end of your small business,. However, if a divorce is imminent then your business might be at risk. Aside from the anxiety, you may also be facing financial turmoil. Whilst you may prefer to be focusing on growing your business, it’s likely the divorce will impact your business. Further, the implications might be serious.

Impacts on your business

You will need to invest time and effort meeting with lawyers and gathering documentation about the business and finances. This is likely to lead to further questions about your businesses practices and P&L. Often both parties will seek to engage their own independent financial experts and seek separate valuations. This can be a time consuming and ultimately expensive process. Your staff may also feel the uncertainty that divorce can bring. The level of conflict between spouses can also be so high that it impacts staff. Issues may emerge around loyalty, your productivity might decrease and damage and your relationships with customers might even suffer.

Deciding the future of your business

Once valuations are complete and both parties understand their financial positions, you’ll need to make decisions about the business and its ownership structure. If you own the business through a family trust, it is likely this will cause more complications. Therefore, it’s important that you and your spouse understand the tax implications both now and in the future. This allows you to plan for the future of the business should a divorce-driven settlement be the final result.

If you are a small business owner, what are some practical steps you can take to prepare your business in the event that you ever need to separate or divorce? Lawyer Damin Murdock says “there are ways to prepare and minimise the impact on your business, ahead of any unfortunate divorce or sale of your business”.

How to minimise the impact on your business

If you have established a family business where both husband and wife are directors and shareholders of the business, then here are 6 ways to prepare and minimise the impact of possible divorce and property settlement:

  1.  Maintain accurate and up to date financial records at all times.
  2. Make sure your business never accepts cash-in-hand payments. This is due to the fact that these kinds of business practices can be used against you in family court proceedings. This could also lead to a clear divide between business valuations;
  3. Consider entering into a Shareholders Agreement with your spouse. This will result in the husband and wife having to comply with the terms and conditions of the Shareholders Agreement with respect to valuing the business; transferring shares between shareholders; and forcing dispute resolution procedures to take place, prior to any court proceedings being initiated;
  4. If you are the sole shareholder/director of a family business and you have other business partners, consider entering into a Shareholders Agreement which explicitly states a spouse or other family member is refrained from taking ownership of the shares in the business. This is generally obtained by way of having a default provision in the Shareholders Agreement. For example, if a shareholder/director dies, becomes incapacitated or divorces, then prior to the shares being offered for sale to a spouse or other family member, the shares must first be offered for sale to the other shareholders at a reasonable market value, based on the valuation procedures specified in the Shareholders Agreement;
  5. Consider entering into a pre-nuptial/post-nuptial agreement with your spouse (notwithstanding these kinds of agreements are not always enforced by the Family Law Courts); and
  6. Consider establishing a family trust without your spouse being a beneficiary of the trust and then establish a corporate trustee to hold the shares of the family business for the benefit of the family trust.

Don’t know where to start?
Contact a Lawpath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Author
Dominic Woolrych

Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.