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Divorce and business ownership: What happens when spouses split?

If couples who co-own a small business decide to divorce, can they preserve its viability by continuing to work together or is it a bridge too far? Here are some things accountants, as advisors, should keep in mind with divorce and business ownership cases.

Mark Phillips | October 2019

In April the divorce between Amazon founder and CEO Jeff Bezos, the world’s richest man, and his wife MacKenzie was finalised with Bezos retaining the lion’s share of the business and his former wife now holding a 4 per cent stake in Amazon shares, worth roughly $A45 billion.

In tweets following the agreement both parties seem to believe it is possible to maintain a mutually beneficial relationship. Unfortunately, for mere mortals such as couples who may have spent years building a small-to-medium business, only for their marriage to flounder, that might be easier said than done.

The collaborative divorce

When things fall apart, realistically there are only three options: dissolution of the business and splitting the proceeds; a buyout by a spouse; or continued joint management. The latter is arguably the hardest, but not, according to Hetherington Family Law principal Jennifer Heatherington, impossible.

Resolving conflict through collaboration – or “collaborative divorce”, as it is sometimes known – is a relatively new way for married couples to respectfully finalise the legal aspects of their separation, without going to court.

“For someone to be suitable for collaborative [divorce] practice I ask one important question: Can you contemplate putting yourself in the other person’s shoes and imagining things from their perspective? It’s not all about you,” Hetherington says.

When the accountant is the adviser

In this type of arrangement, it is critical that both partners to work with their professional advisors and for accountants and financial planners to talk with lawyers.

“Background information and even things like an accountant providing a structure diagram, constitutions and trust deeds can be incredibly helpful,” Hetherington says.

The benefit of collaborative practice is that a financially neutral party can work with an existing accountant and information such as financial statements and tax returns be provided directly from the source to another qualified professional well placed to interpret it, rather than lawyers.

“That preserves the client relationship with the business owners, rather than being placed in a situation of conflict where the accountant is effectively asked to mediate but has to take sides with one business owner rather than the other.”

Ethical requirements

If you have clients who are undergoing a divorce also consider APES 110, the Code of Ethics for Professional Accountants (paragraphs 220.1 to 220.6) which refers to how accountants should manage conflicts of interests.

Practitioners must be aware, as CPA Australia head of public practice Keddie Waller notes, that the Code of Ethics includes specific obligations that professional accountants must be aware of that may apply in the event of a divorce for existing clients.

“For example, they may need to seek their client’s consent to act for the other client where their respective interests may be in conflict. If the client does not provide this consent, they cannot act for the other client with regards to that matter,” says Waller.

Clearly define roles

Another issue to contend with, especially in smaller businesses, is the emotional stress of having to constantly interact with a former spouse while still capitalising on the key strengths and expertise of both. Formal agreement on the roles each person will take is critical.

“Clearly defining the roles, expectations and remuneration of each party can reduce the stress,” Hetherington emphasises. Importantly, it can also minimise the need for parties to communicate in relation to the minutiae of running the business and leave each party to effectively get on with it, without having to constantly ask each other questions, which can be easily misinterpreted.

Keep staff in the loop

Regardless of how determined a former couple might be to keep their business afloat, staff aren’t naive and will soon realise it is not “business as usual”. Indeed, the longer news of a breakdown is kept from them, the more questions will arise and the more insecure they are likely to become, possibly to the point where some side with one spouse over the other.

“Just as you would with your children, it’s best to come up with an agreed statement that reassures them about the continued operation of the business and their position, and that the marriage breakdown won’t impact the business moving forward,” Hetherington says.

But what if it does? In a frequently at best fraught working environment, when divorced or separating parties want to continue operating a business together, there aren’t any guarantees.

Have an exit strategy

According to Hetherington, the biggest pitfall can be not adequately factoring in what happens if things do go pear-shaped and one party wants out. Having in place an exit strategy is imperative, whether it be a shareholder’s agreement contained within a binding financial statement, or some other separate mechanism. Also vital is how the business would be valued on exit.

“If you're continuing to co-parent children and disagreements arise, they can inadvertently flow through to business operations and have a negative impact,” Hetherington warns. “People often underestimate the ability of these seemingly unrelated issues to blend together.”

Further resources from CPA Australia