A business is often one of the most valuable assets seen in a pool of property after separation and divorce.
In new relationships, that business has often been accrued prior to commencement of the relationship, and represents the creativity, acumen and hard work of one of the spouses.
In later or ‘second’ relationships, the interest in the business has often been retained by a spouse when the property settlement in respect of their prior relationship was concluded.
In the case of a ‘family’ business, the interest of a spouse in it has commonly arisen through prior generations of their relatives having established the business, but with that spouse having worked in it from a young age (and therefore being granted an interest in it).
In many instances, there are other stakeholders involved in the business – business partners, other family members, shareholders. The last thing those people want is to be involved in the family law matters of one stakeholder, and have the business dragged through the legal processes involved with separation and divorce.
The trouble is that legal outcomes are not always clear. That is certainly so in family breakdown situations, as it is not known when (if at all) separation will ever occur, and therefore, what is likely to occur in relation to a business at that unknown future point in time. Things are ‘grey’ when spouses, and those in business with them, want them to be ‘black and white’.
In each of these situations, therefore, people embarking on a new relationship will want to know that their business is free from claim if the worst happens and, despite their best efforts, their relationship fails. Equally, people who are going into business together will want to know that the subject business will not be pulled into any battle between their business partner and their spouse.
In short, prevention is better than cure if you want to take as much ‘grey’ out of the situation as is possible.
Why is it that this focus on prevention can be so important? Put simply, separation and divorce can be damaging to a business. Often there is the significant and expensive task of supplying documents about the business, in order to value the interest of the separating spouse in it. Its employees and associates often become aware that the business is the subject of a family law dispute, and that can work to create uncertainty in the eyes of staff, and undermine business relationships, all of which can adversely impact on productivity. Where plans for growth must be suspended while a dispute is resolved, competitor businesses can take up those opportunities, and gain a commercial edge. All the while, the spouse(s) who were involved in the management of the business have their energies divided, having to also manage their personal matters (the property settlement), such that the business no longer has their total attention. These things have a habit of affecting the bottom line of any business.
To prevent the business ever being exposed to these situations can therefore avoid a very real financial impact.
The Family Law Act allows for agreement between spouses about the treatment of financial matters after separation to be recorded in a Financial Agreement. Importantly, that Agreement can specify what is to happen in relation to a business if separation were to occur. It allows the introduction of ‘black and white’.
Some spouses decide that a business will be entirely ‘quarantined’ – retained by the spouse who brought it into the relationship, free from any claim by the other. Others decide that a formula to value the business will be included in the Agreement, with the business to be retained by a specified spouse, the other’s interest being ‘cashed out’.
There are no wrong answers, and parties are free to come to their own agreement about the fate of a business after separation (and any other items of property), and record it in the Financial Agreement.
Either way, the objective is to see to it that, as much as is possible, there is certainty about what is to occur with the business if a decision were ever made to end the relationship. That way, the business is not exposed to a relationship dispute, and not made to jump through the ‘hoops’ that such a dispute involves.
Like an insurance policy, this clarity is what people are ‘buying’ with a Financial Agreement – without it, there is no knowing what the outcome will be in relation to a business in the event of separation.
With a Financial Agreement it is therefore a case of hope for the best, but plan for the worst – spouses will invest whole-heartedly in their relationship, but if for whatever reason separation becomes a reality, then there is a clear financial outcome provided for in the Financial Agreement, and a plan in place to guide both spouses through the steps necessary to implement that outcome.
Perhaps unsurprisingly, Financial Agreements are expensive. A lot of time and thought goes into the negotiation of their terms, and into their crafting. They must be prepared with absolute precision, given the importance of achieving their intended effect, and that means legal cost. However, if measured against the financial cost of a drop in business profitability, the funds spent on a Financial Agreement will likely be insignificant. When weighed against the legal costs of a contested property settlement, and the time and emotional energy that involves (see my Blog ‘The Hidden Costs of Divorce’), a Financial Agreement is, for many, a ‘no-brainer’. That is particularly so for people who have endured litigation in connection with a prior marriage or relationship, and who have seen, first-hand, the direct and indirect costs involved.
It goes without saying that the concept of a Financial Agreement must be raised thoughtfully, so as not to be divisive. The challenge is that its purpose is to prepare for the relationship to end at a time when that relationship is only beginning. That can seem counterintuitive. However, it is only like any of the other legal ‘planning’ documents we use in life to manage risk, such as a Will. By having a clear plan around those things is to in fact remove them as obstacles in a relationship – when the uncertain becomes certain, it is less possible for it to be a source of conflict.
The opportunities in life to be able to legally ‘plan ahead’ are limited. While none of us has a crystal ball, and accurately predicting the future is therefore impossible, we can attempt to minimise the effect of events which are statistically possible (here, the possibility of relationship breakdown). A Financial Agreement will therefore be attractive to those who want to do that future planning – to make as clear as is legally possible what is to happen with their business (and other items of property) if their relationship ever became a separation statistic, and in so doing, shield that business from the trauma of enduring a contested separation.