What Happens to a Business in Divorce?
When a marriage or civil partnership ends, the division of assets often becomes a big consideration. Answering the question ‘What happens to a business in divorce?’ will depend upon factors like the type of business, the contributions of each spouse, the length of the marriage, and the overall financial picture. It’s also important to note that there isn’t a single approach that can be applied across the board.
If dividing business assets in divorce is a concern for you, it’s important to seek legal guidance. Knowing your legal footing can help to clarify your options going forward and work towards securing a fair outcome. This is where Thursfields’ full-service solicitors can help.
What Happens to a Business in Divorce
Business assets are widely viewed as being matrimonial assets, so will be considered for division. The origins of the business, i.e. who set up and ran the company, is less relevant. It’s important to note that this applies only to England, Northern Ireland and Wales, with Scottish courts only dividing business assets in divorce that were acquired during wedlock.
If you’re wondering what happens to a business in divorce and separation, there are a few possible outcomes. In general terms, if one spouse founded and operated the firm, the courts will try to ensure they retain ownership. In this scenario, the company owner may be required to part with alternative assets to compensate for keeping business assets.
The items to be offset often include properties, investments, cash, vehicles, and anything else of value.
In the case of limited companies, it may be necessary to transfer shares from one spouse to another to allow the owner/founder to remain in control. While the courts prefer not to order the sale of a company as part of a financial settlement, it can — and does — happen.
Company Shares and Divorce – How Does it Work?
When it comes to family businesses, specifically company shares and divorce, dividing assets can become much more complex. In some circumstances, an amicable split is achievable, meaning both spouses could potentially continue to work together as business partners. However, this is not always practical.
If relations are more strained, one party might choose to stay on as a ‘sleeping director’. This would allow them to retain shares while letting the ‘owner’ manage day-to-day operations. Alternatively, the business owner could choose to buy out their former spouse, or arrange the sale of shares to a different director.
If you’ve exhausted all options around company shares and divorce, the last resort could be to either sell the business or let the courts decide. Ultimately, it’s important to receive appropriate guidance throughout this process, to ensure a fair outcome. An experienced family law firm can write a legally-binding consent order that clearly explains how you intend to handle dividing business assets in divorce.
Business Valuation in Divorce Cases
Business valuation in divorce cases is essential, as it will help to determine the overall value of the matrimonial pot. Equally important is that the valuation is as accurate as possible. Full and frank disclosure of the business valuation is included on Form E, alongside all other finances, incomes, revenues, assets and liabilities.
An independent valuation is advisable, although smaller companies could do this themselves using factors like cash flow, the worth of similar sized competitors, or the estimated value of business assets. Business valuation in divorce cases is often overseen by an independent forensic accountant on behalf of both spouses.
When it comes to the valuation itself, this can take one of several forms, depending on what is most appropriate for the business itself. The most common strategies for valuation are:
- The Market Approach: This technique takes into account what a potential buyer would pay for the company at current market value. This works for limited companies, as the recent share price of similar entities forms the basis of the valuation.
- The Cost Approach: This method considers how much it would cost to set up a similar business in the present day based on the current value of like-for-like assets. This approach doesn’t consider future performance, focusing instead on the value of assets minus the value of liabilities to reach a figure.
- The Income Approach: This method uses projections to settle upon a valuation. Also known as ‘discount cash flow’, a discount rate is applied against forecasts based on potential risks to income. Understandably, this approach towards business valuation in divorce cases only works when there are detailed income projections.
- The Comparison Approach: This technique uses either the valuation of comparable stock or the sale of similar-sized business as a guide.
- The Dividend Yield Approach: This is a useful method when one spouse owns minority shares in a company, so has limited control. The dividends an investor would receive for their shares forms the basis of the estimated value.
It’s important to note that the valuation method can significantly impact the estimated value of the business. In some cases, divorcing spouses and their legal teams might need to agree on which method to use or seek the guidance of the court.
How to Protect A Family Business in Divorce
Protecting a family business in divorce is often one of the biggest and most complex challenges. And, while it’s not possible to exclude your company from an eventual settlement, there are ways to try to protect it. These include:
- Pre and Postnuptial Agreements: While not currently legally-binding in the UK, the courts may take into account pre and postnuptial agreements. However, they will need to meet a set criteria in order to hold any weight. That criteria insists that both parties entered into it freely having received legal guidance and that the breakdown of finances was full and frank.
- Keep Things Separate: Keeping the company and household finances separate can show the two as being distinct.
- Offsetting: As touched on earlier, using other assets to compensate for the value of business assets can be a useful tactic during negotiations.
For more information about how nuptial agreements can be used to protect assets from divorce, you can read our blog here.
How Thursfields Handles a Family Business in Divorce Cases
The division of commercial assets due to separation can seem daunting, so a thorough understanding of what happens to a business in divorce is crucial. Even an amicable end to a relationship can lead to complex discussions over the future of high value possessions, with business interests often one of the most contested factors. We also know that no two relationships are the same, so offer practical legal advice built around you.
Experts across family law — we can help to untangle even the most intricate financial situations. We will work tirelessly on your behalf to secure a fair outcome. A full-service law firm, we can advise upon everything from buying and selling a business to inheritance tax and trusts.
We aim for a balance between being results-oriented while also understanding that a sensitive approach might be needed. Starting from your initial goals, we will work diligently towards your desired outcome. For more information Contact us today.
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