What happens to the family business during a property settlement?

For many couples, a family business isn’t just an asset; it’s their livelihood, their legacy, and sometimes, their biggest financial investment. So, when a marriage ends, what happens to the business? Who gets to keep it? How is it valued? And what are the options if both parties are involved in its running?

Navigating property settlements involving a family business can be complex, with factors like business ownership structures, financial contributions, and future earning potential all coming into play. In this guide, we’ll break it all down.

If you or someone you know is facing this situation, understanding your options is the first step toward a fair and sustainable resolution. Let’s dive in.

Key takeaways

• A family business is included in the asset pool during a property settlement and must be formally valued.
• The court considers factors like ownership structure, each spouse’s role, and financial capacity when deciding who retains the business.
• Options include one party retaining the business, selling it, or (less commonly) continuing joint ownership.
• Common pitfalls include undervaluing assets, misusing business funds, and disrupting operations during separation.
• Seeking early legal, financial, and tax advice helps protect both the business and personal financial interests.

Speak with a family lawyer

If you’re navigating a separation that involves a family business, don’t go it alone. Speak with one of our family lawyers today to understand your options and protect your interests.

How is a family business valued in a property settlement?

When navigating a property settlement under Australian family law, the value of a family business plays an important role in determining the asset pool available for distribution. This assessment occurs at Step 1 of the property settlement process, where all assets, liabilities, and financial resources of both parties are identified.

Business valuation typically follows one of two common methods:

1. Net assets approach: This method calculates the business’s value by subtracting its liabilities from its total assets. It is often used for asset-heavy businesses where tangible property, equipment, or inventory significantly contributes to overall value.

2. Future maintainable earnings (FME) approach: This method considers the business’s expected future profits, incorporating intangible elements such as goodwill, brand reputation, and client/customer relationships. It is commonly used for service-based businesses where ongoing profitability is a key factor.

The appropriate valuation methodology is determined on a case-by-case basis by an independent expert, such as a business valuer or accountant, depending on the structure and nature of the business.  

While other valuation methods exist, these two are the most widely used in Australian family law matters.  In the case of some businesses, both of these methods are used to reach the value of the business and the entity (e.g., company or trust) that conducts it.

How a family business is treated in a property settlement

There are two key scenarios to consider when a family business is involved:

1. One spouse’s connection to a family-owned business
   If the business is primarily owned and controlled by one party’s extended family, rather than both spouses, their interest in the business must be carefully examined. The key considerations include:
   
   • Is their involvement limited to that of an employee, meaning they have no control over the business operations or entitlement to its income and capital?
   • Or do they hold an office-holding position or a formal interest (such as a company shareholding) in the business that must be accounted for in the settlement?

If they have no real ownership stake beyond their employment, the business may not form part of the asset pool. However, if they have an ownership interest, whether through shares, trust entitlements, or direct control, this value must be considered.

2. A business operated by both spouses
   If the business has been jointly operated or invested in by both spouses, and its ‘ownership’ rests with one or both of those spouses, its full value is typically included in the asset pool. This can lead to disputes over:
   
   • Retention of the business: If the business is an income-producing asset, a key question will be which party retains ownership as part of their property settlement entitlements, and what impact that will have on the circumstances of each party, moving forward.
   • Valuation and division: A formal valuation may be required to determine the business’s worth and ensure an equitable division of assets.

Ultimately, the treatment of a family business in a property settlement depends on ownership structure, control, and financial entitlements.

Who gets to keep the family business?

Unlike other assets that can be easily divided or sold during a separation, a business is often an ongoing operation that provides income and has sentimental or strategic value. In Australia, the decision of who keeps the business depends on several key factors.

• The roles each party plays in the business
  A critical question is whether one spouse has specialised skills or qualifications essential to running the business. If only one party possesses the necessary expertise, it may be more practical for them to retain ownership.
  
• Goodwill and referral networks
  In some businesses, one party may have been the “face” of the operation, building key relationships and goodwill with customers or clients. If the business’s success is closely tied to one party’s reputation, that factor may influence who retains ownership.
  
• Who was more involved in establishing and operating the business?
  While both parties may have contributed financially or administratively, the court will consider whether one spouse had a more significant role in launching and managing the business. This can impact decisions regarding ownership post-settlement.
  
• Who wants to retain the business?
  Not every party fights to keep their shared business. Sometimes, only one party is interested in continuing its operation, while the other prefers financial compensation in exchange for their relinquishment of it. This preference can also impact the outcome.
  
• Financial capacity to retain the business
  If one party wants to keep the business, they must also be in a position to do so. This includes:
  
  • Ensuring they have the financial resources to ‘buy out’ the other party’s interest.
  • Balancing the retention of other assets (e.g., real estate, investments) within their financial means.

Options for dividing a family business in a property settlement

When a family business is part of a property settlement, separating couples must decide how to handle its division. 

There are three primary options, each with its own practical and financial considerations:

Retention by one party

The most common and practical option is for one spouse to retain full ownership of the business. In this scenario, the business is allocated to the retaining party as part of their property settlement entitlements. The other spouse receives a larger share of non-business assets (such as property or savings) and/or a cash payment to balance the division.

Selling the business

If neither party wants to retain the business, or if a buyout is financially unfeasible, the business may be sold, and the proceeds split between the parties. This option can be straightforward, but can also present a challenge if a sale is not commercially viable (for example, if there is a limited market for it).

Retaining joint ownership

While less common, some couples choose to continue co-owning the business post-separation, transitioning their relationship from being ‘spouses’ to ‘business partners’. This approach can be challenging and typically requires:

• A Shareholders Agreement or other document recording each stakeholder’s rights and entitlements in the running of the business, executed alongside a Financial Agreement to clearly outline rights, responsibilities, and dispute resolution mechanisms.
• Specialist commercial, accounting, and financial planning advice, in addition to family law advice, to ensure a workable and sustainable arrangement.
• A clearly documented exit strategy in case joint ownership becomes impractical or undesirable in the future.

Potential pitfalls when dividing a family business in a property settlement

While dividing a family business during a divorce, several challenges can arise, potentially complicating the process and impacting financial outcomes. Some of the key pitfalls include:
Hiding or undervaluing assets

• A common issue in property settlements is one spouse attempting to undervalue the business, particularly if they intend to retain ownership. This can involve misstating revenue, concealing assets, or manipulating financial records. A formal business valuation by an independent expert can mitigate this and ensure transparency and fairness.

Using business funds for personal expenses or legal fees

• When business funds are used to cover personal costs or legal fees, this can denude the business of operational cash, creating cash flow and trade problems for the spouse who will be retaining it, and also create loan accounts that affect the business’s overall value. Additionally, misusing company funds can lead to tax implications, impacting one or both parties post-settlement.

Notional distribution of income and financial impacts

• Business structures such as trusts or companies may have notional income distributions, where income (associated with periods prior to separation, and post-separation) is allocated to an individual even if they do not physically receive the cash. This can affect eligibility for Centrelink benefits and the rate of child support payments.

Disrupting business operations

• If both spouses remain involved in the business post-separation, ongoing conflict can create operational challenges. While this risk is speculative, a high-conflict situation could make day-to-day management difficult, affecting staff morale and overall business performance.

Impact on business relationships

• Divorce can also have indirect consequences for the business, particularly in industries where personal relationships drive success. Clients, employees, and suppliers may become wary of instability, leading to potential reputational and financial risks. While this is also speculative, maintaining professionalism and a clear business strategy is essential to preserve relationships (and thereby keep business revenue stable). 

To avoid these pitfalls, seeking expert legal, financial, and tax advice is essential. A well-structured settlement agreement, clear financial disclosures, and careful planning can help ensure the division of a family business is handled fairly and with minimal disruption.

Even as a settlement is being negotiated, keeping an eye on these things and avoiding these pitfalls can shield the business from the effects of separation. 

How can business owners protect their jointly operated business during a divorce?

If the business is jointly operated, it is important to start with thorough information gathering, ensuring both parties have access to all financial records, business documents, and the accountant’s contact details.  Blind spots around business operations leads to fear, and fear leads to the taking of protective steps, which can have the negative impacts referred to above. 

Additionally, it is suggested that each party monitor bank accounts to ensure that there are no dealings with business income and expenses that could impact the business’s financial standing. 

If there is a climate of distrust between spouses, then in order to avoid scope for disagreement, it may be wise to establish (by mutual agreement where possible) a holding pattern whereby key accounts are operated on a joint signatory approval for major transactions.  This can allow each spouse’s fears to be neutralised and allow them to focus on business operations. 

Lastly, we cannot stress enough the importance of seeking early legal advice to protect both the business and individual financial interests.

How is the business accounted for in the property settlement?

The business (or the interest in the entity that conducts it) is included in the asset pool at its formal valuation. If one party retains it, its value is placed on their side of the balance sheet. This means that:

• The non-retaining party may receive other assets or a financial payout to ensure fairness.
• Settlement orders or agreements must include detailed provisions to remove the non-retaining party from the business structure.
• Any shares, entitlements to income, or ownership rights must be legally assigned to the retaining party so that they can trade forward with the business being retained. 

Final thoughts: What happens to the family business during a property settlement

Dividing a family business in a property settlement can be complex, with emotional, financial, and legal considerations all at play. Whether one spouse retains ownership, the business is sold, or joint ownership continues, careful planning and expert advice are essential to achieving a fair and durable outcome.

Understanding your rights, securing a proper business valuation, and exploring all available options will help ensure a smooth transition and protect both the business and personal financial stability. 

Seeking early legal guidance is the best step toward making informed decisions and securing the future of your business.

Ready to take the next step?

Property settlements can feel overwhelming, but you don’t have to navigate them alone. Getting the right advice early can make the process clearer and help you move forward with confidence. Reach out to our team of family lawyers to get advice.

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