No one starts a business expecting it to fail but, of course, around half do. Similarly, no one begins a romantic relationship thinking about the end but, as we all know, around a third of Australian marriages end in divorce.
What happens when these statistics collide?
Last year, the owners of a Victorian building company were almost forced to sell after a judge ordered that the business be divided as part of a divorce property settlement. The order was successfully appealed, but the case illustrates the potential risks.
As a family lawyer I’ve seen many examples where the end of a relationship, be it a marriage or defacto partnership, puts the future of a thriving business under a cloud. I’ve seen it affect everything from start-ups to established family businesses.
It can impact other parties too, not just the divorcing couple. Consider a situation in which two business owners are each married to other people. Should one separate from a spouse, the other might be put into the position of having to buy them out.
Of course, divorce rarely chooses the best time, for example when a firm is at its peak valuation or commercial interest rates are low. Instead, owners could well be put in the situation of having to seek an unexpected sale, potentially at less-than-ideal terms.
How to plan for family-related issues
Ideally, we’d consider and plan for these risks when first starting, or buying, a business. All too often though, that’s not the case. It perhaps shouldn’t surprise us there is a blind spot here. After all, a degree of optimism is fundamental to the entrepreneurial spirit.
That’s why it’s important to get clear-eyed advice from a qualified, disinterested third party – a lawyer, accountant or other business advisor – early on in the process and be sure to consider the potential impact of family law.
The solution is fairly simple really. A Binding Financial Agreement (BFA), aka pre-nup, can help protect the assets of new business owners and their spouses and reduce the potential for acrimony and instability down the track.
A BFA can also help protect the intentions of parents seeking to pass on ownership of established family businesses. Mum and Dad may have spent decades building a firm, but once the kids receive their shares, so too might their spouses.
The stakes might be higher than you think.
In what sounds like a storyline from Succession, the Productivity Commission has estimated Australia can expect a wealth transfer of approximately $3.5 trillion by 2050 as the assets of the Pre-War and Baby Boomer generations are passed down.
That’s more than the value of every company on the ASX today combined.
So, for the owners of our 1.4 million family businesses, there are good reasons to think now about how to ensure a smooth transition of those hard-earned assets to their intended recipients, i.e. children and grandchildren, in the future.
Entrepreneurship is an inherently optimistic understanding. No-one starts or buys any business, big or small, with a partner, family members or friend without an inherent level of trust. But running a successful business is also about managing risk.
That’s where we’d say our experience as experts in family law suggests good fences make good neighbours. Running a business is challenging enough without also having to consider the wildcard impact of relationship breakdowns in the business plan.
