In the period immediately following a separation or divorce, a person’s attention is often focused on things that are immediate and pressing. Questions like, ‘who are the children going to live with?’ and ‘who is going to keep the house?’ are often the matters that are front of mind for parties to a separation.
While the questions above are certainly important, and it’s appropriate that they initially take priority, when a business owner’s marriage or de facto relationship breaks down, there can also be significant consequences for their business. Head of our Family Law team, Haydn Marsh, discusses some of the relevant issues in this article.
Under the Family Law Act, a person’s equitable interests in a business, whether held solely or with another person, is considered to be property for the purpose of dividing assets between parties to a separation. This means that a business would be added to the pool of property that is available for division between the parties.
If, as is often the case, the person conducting the business decides that they are going to keep the business as part of the property settlement, this can affect the proportion of other assets in the property pool that they might receive.
Take the example of a property pool of a separated couple (A and B) that is comprised solely of the family home ($750,000) and the business ($250,000). Then, if it’s agreed that the pool be split 50/50 between the parties, with A (the business owner), keeping the business, and the family home being sold, then A would receive $250,000 from the sale of the home in addition to keeping the business, while B would keep the remaining $500,000 from the house sale.
However, this is a simplified version of a property pool as parties also often have many other interests in shares or companies, superannuation, motor vehicles or other assets, as well as various liabilities. The percentage division applied to a property pool will also vary depending on a variety of other factors, including the contributions that each party has made to the property pool, and the parties’ respective future needs.
Valuation of businesses for family law purposes
For a business to be properly considered to be part of the property pool, it’s necessary for either:
- The parties to reach an agreement about the value of the business; or
- For the business to be professionally valued by an appropriately qualified accountant.
How a business is valued for family law purposes depends on the structure of the business. A partnership or sole trader’s business wouldn’t be valued in the same way as a business that is operating through a corporation, a trust, or a combination of both.
Generally, for small businesses, the value of the business will be calculated based on the resale value of assets and equipment held by the business, plus the value that can be attributed to the business’s brand, or ‘goodwill’.
One of the primary considerations for valuers in determining the value that can be attributed to goodwill in the business is the profitability of the business over time. However, where the value that might be attributed to the goodwill that exists in a business is dependent on the owner of the business continuing to conduct the business themselves, then it may be that there is little or no value attributed to that goodwill.
A simple test that can be applied to determine whether there is goodwill in a business that should be accounted for in a family law matter can be conducted by asking: ‘Would someone be willing to purchase the business without the business owner continuing to be involved?’.
If the answer to that question is ‘no’, then the value of the business, for family law purposes, is likely to be limited to the resale value of the assets and equipment. This is often the case for builders, plumbers and other tradies who do not have any employees and conduct their business as a sole trader.