Get the Answers: Family businesses in jeopardy when marriages fall apart

Deborah Hollings. Photo / Supplied

The man often takes the business and the woman the home, says Deborah Hollings QC, trust litigation and relationship property lawyer, Bankside Chambers.

The bulk of small family businesses are husband-and-wife concerns which in general work well. But if the relationship falls apart, and the right legal conversations haven't taken place in the beginning, it can have ramifications for both the business and for the earning power of the partners.

What is the most common way that business assets and personal assets are broken up in the case of divorce?

In the classic divorce settlement, usually one party will take the business and the other will take the family home. It is more common that the man takes the business and the debt, while the woman takes the nest egg, the family home, assuming the home and business are relationship property. Each parties' half-share of the asset they don't keep is offset against what they take so an equal division occurs.

The recession has resulted in less formulaic results, and I see cases where husbands are refusing to take on that much debt or risk in this climate.

Research shows that the partner who comes away with income-earning assets usually does better in the long term. This can be because quite often the company is undervalued in the break-up. The company might be conservatively valued at $20 million, but is sold later for $60 million because of an enthusiastic buyer.

How do shareholders' agreements work in a marriage break-up?

In companies operated by spouses or de facto partners, a shareholders' agreement can be drawn up which states what would happen in the case of divorce. The parties should also consider what would happen to the shares if one of them dies. Should they be held jointly or separately? If one partner has the right to purchase the shares interest on death or divorce then they should consider a formula for agreeing fair value.

When starting out together people tend to be optimistic and think they are going to get half each if it all goes pear-shaped. That is not necessarily true. People shouldn't hesitate to discuss these issues with their lawyer.

What should couples think about when going into a new business together?

People need to think pretty carefully about ownership and what the effect of separation would be on the ownership structure. If you are both running it together, then you might keep it simple where you have 50 per cent of the shares each and both are directors. Even if one party acquires more shares, say 80 per cent to 20 per cent, during the relationship and they are relationship property, the split on separation will still be 50/50.

The best thing to do is to have upfront discussions as you start up the business. They should be asking questions like: "What happens if one of us dies or we separate?"

Who comes out worse in a small business when a marriage breaks up?

Women need to protect themselves against a loss of earning capacity. If they leave the running of the business to the husband and stay out of the paid workforce for a long time, they come out of a marriage with no ability to earn an income. Often there is not a formal record of any contribution.

Women need to prove that they were providing more than just emotional support to the business. It's quite common for women to be paid a salary from the business while not actually doing anything tangible. They will lose this income in case of divorce.