A My Business reader asks where the law stands when it comes to mutual assets being used in a new business during a divorce. Family law specialist Nathan McEwan responds.
Reader question: "My ex-husband has opened a new business prior to reaching settlement and is using our old business equipment. Can this business form part of the pool for settlement, or does it depend when it [has] started?"
This is not an uncommon question. While it may seem simple at first glance, it is quite a complicated situation depending on the facts, the business entity, and the equipment.
A business is an asset of a relationship, and that asset's value is generally comprised of a number of factors – goodwill, IP, plant and equipment, stock, work in progress, cash in bank accounts, and debtors and creditors.
Obviously, in most relationship separations there is a need to divide assets between the spouses. The first step is always to construct a balance sheet comprising the assets, liabilities and financial resources of the relationship, and to place a value on those, hence necessarily including the old businesses and the business equipment.
This scenario raises several questions:
• What is the value to be attributed to the old business as a whole (including the old equipment)?
• Is the old business essentially one and the same as the new business?
• By the husband using the “old business equipment”, has that affected the value of the old business or brought it to an end?
• Is the value to be attributed to the new business different to the value of the old business?
• What financial benefit (current and future) is the husband deriving from using the old business equipment in the new business?
• How will the profits of the new business be distributed?
The answers to these questions will determine how the business and equipment are treated in the property settlement.
If we assume that the old business relied on the old business equipment to operate, that the new business opened by the husband is essentially the same old business, and that the husband is solely operating the new business, then for family law purposes it is more likely than not that the new business will be treated as if it is one and the same as the old business.
Therefore the value to be attributed to the new business will include the old business equipment.
The value can be ascertained by obtaining the financial documents for the past trading performance of the old business, along with the trading documents of the new business. An accountant can then conduct a business valuation.
That business value will then be included in the balance sheet of assets, liabilities and financial resources of the relationship. Presumably the husband intends to retain the business, the court will take that benefit into account in determining the details of the property settlement.
If the husband has used the old business equipment to start up a new business with another person, or merged the business with another business, that creates a more complex situation.
In this scenario it is important to determine:
• what type of new business structure the husband has commenced
• the inventory of equipment for the new business (including the old businesses equipment)
• what proportion of the new business (entity) is held by the husband
• what proportion of the value of that new business should be attributed to the old business and its equipment
It will still be necessary to ascertain the value of the old business, including the value attributed to the old business equipment. It will also probably be necessary to calculate a value for the new business (if possible).
It may then be possible to compare those respective values, and the inventory of equipment of the new business, in order to determine a figure to include in the balance sheet.
Another issue may be a need to track the profits derived from the new business and to determine how to treat those in the overall situation, as well as the commercial benefits of doing so. Obviously if the old business was not profitable during the relationship, there may be little or no use tracing such data.
If the old business has been profitable, and if those profits are likely to continue, essentially they will remain on the hands of the husband. Therefore, it may be beneficial to undertake an analysis of the benefits of those ongoing profits and financial resources and for the wife to be able to claim some additional adjustment from the matrimonial asset pool.
Naturally, one of the other questions that may arise has to do with the length of time which has elapsed between the date of separation and the date that the new business has commenced.
If the old business had wound down considerably and the business equipment had a modest value at the date of separation, then that value would generally be transferred into the new business.
If the ex-husband has then made extra efforts and extra contributions after separation to "reinvent" the old business into the new business, then his contributions post-separation would have to be considered in the overall determination of an appropriate split of assets.
As the husband will continue to derive future income and benefits from the business as a future financial resource, the wife may receive some slight further adjustment of percentages in her favour.
Much will depend on the overall facts of each case, of course, but it is certainly possible to trace the old business equipment to work out how that asset should be valued and where it should sit in the overall division of assets.
Nathan McEwan is a lawyer at Stacks Heard McEwan.