Many businesses are founded and run by a husband and
wife team. What happens to the business if they
The 'clean break' principle
The Family Court's position is that whenever possible, there
should be a clean break between ex-spouses. This means a property
settlement, with the combined asset pool being broken into two
chunks. When the assets include a business, the property split can
take place in a number of ways.
Value of the business is offset by other
The best scenario is when there are additional assets to be
divided. For example, if the business is valued at $500,000, there
is other property in the asset pool with roughly the same value and
the court determines that the appropriate division is 50/50,
it's easy to do a straight swap or split.
Property settlement from company profits over
Obviously, for this to work, the company has to be profitable.
Secondly, there needs to be an element of trust between ex-spouses,
because if only one of them is working in the business, the other
can't necessarily gauge whether the profit on the books is
Lawyers can provide for certain disclosures, such as the books
being checked by an independent accountant. You also need fair and
adequate default provisions, so that if the agreed instalments are
not paid, then and only then is the business sold.
Borrowing money so one spouse can buy out the
This is possible if the company's assets are sufficiently
valuable for a financial institution to accept them as
Selling the business on the open market
Clearly, if the company makes a good profit, owns valuable
intellectual property or has substantial assets (buildings or
land), it has a better chance of a successful sale than if it
doesn't. Ideally, the business should be at arm's length to
the proprietor, have good governance, employ qualified managers and
have a clear structure of responsibilities.
An SME running a system of production or manufacture is more
likely to be attractive to buyers than a professional services
company where the goodwill is attached to the proprietor.
Bringing in another investor
If the company's profits are to be paid to the
proprietor's former spouse instead of being reinvested in the
business and there is a risk that the company will be sold in the
case of default, it's unlikely that you will be able to attract
an arm's length investor. However, an interested relative like
a parent or new spouse may be prepared to help out.
Both people continue to operate the
This can happen when it is in the interests of both people or
there is no practical alternative, because the business is their
only asset and it cannot readily be carved up.
In some instances, couples have used consent orders in the
Family Court almost as a constitution of the company, setting out
how they will delegate tasks and manage affairs into the future.
I've seen other instances where employment contracts for the
husband and wife have been incorporated as an annexure to court
orders. This is very rare and usually only temporary, until there
are sufficient funds for one spouse to buy out the other.
Know when it's time to move on
Ultimately, successful businesses are built on successful
relationships. Couples who have separated or divorced are not
likely to be ideal long-term business partners, no matter how civil
their break-up was. And if you can no longer stand the sight or
sound of the person who used to be your life's partner,
it's best to pack up your kit bag and move on. Just make
sure that you look over the edge and plan your landing before
Swaab Attorneys was the highest ranking law firm and the
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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