A My Business reader asked, “What happens when a couple splits up and one of them is involved in a business which has loans and debts?” It can be tricky and will depend on a number of factors, lawyer and litigator Anneka Frayne explains.
After a separation, both parties have an obligation to disclose to the other party what assets they own. The purpose of this disclosure is to ensure everyone is completely aware of the financial position that both partners will be in once the joint assets and liabilities of the relationship are divided up.
This includes business assets and liabilities.
Business assets and liabilities are often very tricky to value. A company that runs a business may own plant and equipment, there may be numerous shareholders, and the directors and employees may have an income stream. But if the business was put on the market for sale, what would it actually sell for? A business is not as easy to value as a residential property.
Usually, the best way to find a market value of a business is to seek an accountant’s view of the business value, as well as an expert to value the plant and equipment.
Of course, just as with a residential property, the liability is also taken into account. Quite often, businesses have overdraw facilities or working capital loans. These have to be weighed up against the value of the goodwill (if any) and the plant and equipment.
Sometimes, because of debt and the depreciating value of its plant and equipment, a small business may even be valued simply as an income stream, rather than having a lump sum value.
Disclosure must be provided up to the date of the court hearing. That means all assets and liabilities, including business and company information, so all loans and assets need to be disclosed and will be taken into consideration, even after separation.
If you do not proceed to court, but have consent orders prepared, all assets and liabilities up to the date you sign the consent orders must be disclosed.
For example, if a husband owns a business and receives a salary from it and potentially some profit by way of dividend or takings, but the business also has ongoing loans such as overdraw facilities, the financials of the business will be taken into consideration in a negotiated settlement or a decision made by a judge, whether it is before or after separation.
In many cases where one of the partners wishes to retain the business post-separation, the business owner makes an agreed lump sum payment to the other party, in consideration of their contribution towards the family, maintenance of the assets, support and any financial contribution that may also have been made.
The non-business assets and liabilities of the relationship are also taken into account in arriving at this agreement.
Where a partner or spouse is in partnership with third parties, or is a co-director and shareholder of a company, the partnership agreement or shareholders agreement and/or the company constitution will all be reviewed and provided to the other partner as disclosure.
There may be specific exit or valuation clauses that may help in the family law disclosure process.
In the end though, after full disclosure, the result of negotiations between the separating partners will be what the parties make of them. It’s important to be both commercial and realistic when negotiating.
Keep in mind any debt, the possibility that a business may have little resale value, and ongoing legal costs in arguing your case.
It’s important to remember that once you’ve separated from your partner, it doesn’t mean that your finances are now separate. Your financial entanglements with your ex — loathsome as they may be to you now — cannot begin to come to an end until the date consent orders are signed or the date of the court hearing.
Anneka Frayne is a lawyer and litigator in the Tamworth office of Stacks Law Firm.
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