In a business context, the failure of a marriage or de facto relationship can result in serious and sudden risks to the business. Preventative strategies can be a critical factor in reducing the impact of such risks on businesses and their participants.
My Business recently published an article by Nathan McEwan, a family law specialist at Stacks Heard McEwan, about how a business is treated in a divorce. One of the clear points that arose from this article was the need to have a plan in place well before such a scenario eventuates — a business pre-nup, as it were.
With this in mind, we asked Nathan to outline exactly what pre-emptive plans can be drawn up to save a business from strife should any one of its owners or partners find themselves in a parting of the ways at home.
Together with colleague Kurt Topper, he outlines the eight key considerations to factor into those plans to help 'divorce-proof' your business:
Where the law stands
Under family law, the court has broad powers to make orders altering the interests of parties in assets, including businesses, as it considers “just and equitable”. This requires the court to identify and assess, among other things, the parties' assets and financial resources, the parties' contributions to their assets and likely future needs.
This means that your ownership interest in a business may be exposed to the claims of your former spouse or partner. This in turn may lead to a significant disruption to the business, loss of business value or assets, a forced sale, loss of control and cash flow or insolvency problems.
Here are some practical tips worth considering:
1. Binding financial agreements
Entering into a binding financial agreement with your spouse or de facto partner before or during your relationship may address an agreed division of one or all of the assets of the relationship on separation and agreed financial arrangements during the relationship.
The binding financial agreement may deal with how the business is to be continued and treated upon separation.
2. Division of personal and business assets
You should maintain a clear separation of personal and family assets from business assets. Structuring the business or your business interest via a trust may provide an additional layer of protection.
However, this must be done long in advance of any relationship beginning or developing problems and its effectiveness will depend on numerous factors. If the separation of business assets is clearly defined, it may be easier for you to detail your contributions to the business, as distinct from personal assets.
3. Separating business assets from trading activities
Appropriate planning can help to structure business asset ownership to minimise or avoid the risk of claims on your business. For example, consider separating business assets such as premises, plant/equipment and intellectual property from trading activities through the use of holding entities, licensing and registered security interests.
4. Pay yourself an appropriate salary
It is advisable to pay yourself a genuine market salary to avoid any argument that you might have diverted family resources to support the business. This will also allow any valuation to be more precise.
5. Don’t get your spouse involved in the business
It is advisable to avoid having your spouse become involved in the business. If your spouse does have some involvement, pay an appropriate wage for the work actually undertaken. This may minimise post-separation arguments around non-financial contributions towards the business by your ex.
6. Keep accurate records
It is important to keep up-to-date, accurate records and be transparent with financial information. In particular, review the business loan accounts and take care when accounting for any directors’ loans, to prevent the accumulation of sizeable accounts which may lead to exposure. If there are loan accounts, then have those properly documented and recorded.
7. Valuing the business
Have an agreement between business partners on how the business should be valued every year. An effective buy-sell agreement may also preserve the ongoing control of the business by other key persons and provide a mechanism for acquiring the business interest of a business owner who is going through a relationship breakdown.
8. Be prepared for all eventualities
Not all of these steps may be appropriate or feasible in all cases and these steps may not prevent a claim being made on your business by your ex, but they may identify more clearly what is and what is not the “relationship property”, as well as the parties’ respective contributions.
Even if you are in a happy relationship, the effectiveness of planning often stems from getting in early, well ahead of any problems arising.
While people generally do not commence a relationship expecting it to end in an acrimonious dispute over assets, all arrangements which could potentially have an impact on your business should at least be considered and deliberate.
Nathan McEwan and Kurt Topper are lawyers in the family law and estate planning teams at Stacks Heard McEwan.