An often underrated financial risk for small and medium business is when the marriage or de facto relationship of one of the business owners fails.
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The subsequent property settlement between an estranged couple can put the future of a business in jeopardy with possibly detrimental implications extending to third-party business partners.
For instance, there is a real risk that a business partner may be forced to dispose of his or her share of the business in order to pay out an estranged spouse.
And such a forced disposal of a major shareholding may lead to a successful business being broken up, potentially destroying much of its value.
The reality is the financial fallout from a relationship breakdown can cause collateral damage to a business itself and all of the commercial partners involved.
Do you need a pre-nup?
Astute SME owners are increasingly entering binding financial agreements with their married or de-facto spouses with an express purpose of trying to quarantine business assets if their personal relationships fail.
In short, a properly prepared binding financial agreement is a legally enforceable private contract that dictates how the assets of married and de facto couples – including their business assets – will be divided if their relationship breaks down.
A term in the agreement can be, for instance, that the spouse who brought his or her ownership of the business into the relationship will keep that enterprise if the relationship ends. In other words, the ownership of the business is quarantined from any subsequent property settlement in the event of a separation.
Alternatively if both spouses own the business together, their binding financial agreement can specify which spouse will retain the business if their relationship ends. Significantly, the agreement can cover the method of valuing the business so that the spouse leaving the business is adequately compensated.
If you operate an SME either as a company, as a sole trader, through a partnership or though a trust, the assets of the business can be protected if a binding financial agreement is in place.
The most widely recognised agreement is a pre-nuptial, which parties enter into before they marry.
The other types of binding financial agreements are a mid-nuptial (entered into during a relationship in the event of a separation) and a post-nuptial, which parties enter into after they have separated (recording the terms of their negotiated property settlement).
De facto partners can into similar agreements.
What happens if you don’t have an agreement
It is critical to understand the possible devastating consequences that a contested marital property settlement can have on your business:
1. Having to produce sensitive business records
Business owners can be forced to produce sensitive business records to the estranged spouse – even if the spouse is not involved in the business. Such records can include financial statements, loan account ledgers, bank statements, future projected profit statements, contracts, wage records, BAS statements and accounting journals.
2. Having the business valued by a so-called single expert
An accountant will scrutinise the business to place a value on it. Inevitably, the other owners of your business, in addition to yourself, will be caught up in this valuation process.
3. Placing employees of your business in stressful situations
A disputed property settlement between business owners is likely to become a major distraction to the day-to-day running of the business.
If all the owners of a business enter binding financial agreements with their married or de-facto spouses, all should gain a greater degree of comfort.
Keep in mind that that Australian Bureau of Statistics divorce data suggests that more than 40% of marriages fail.
In particular, the owners of growing and increasingly valuable business should each consider whether to enter a binding financial agreement if in a personal relationship.
The agreements should be properly prepared with the assistance of independent legal advisers, who give advice independently to each of the parties about its effects, benefits and risks. Typically, your accountants will provide assistance when determining what should be included in the document.
By ensuring the court-enforceable agreement is properly prepared, you can help secure your business’s future.
This can bring peace of mind to family business owners and help ensure the business is passed down intact to future generations and protected from claims by a non-business estranged spouse.
Crucially, the Family Court cannot override binding financial agreements apart from in exceptional circumstances such as the involvement of fraud, duress or unconscionable conduct. The court can also set aside the agreements if there has been a “material change” in the circumstances of a child that would cause hardship to one of the parties to the agreement.
Glenda Laurence is head of family law with Argyle Lawyers. She was one of the first accredited family law specialists in New South Wales.