What happens to your business on divorce?

The process of separating out finances in divorce is always difficult, but add in business interests, and there is a whole new level of complexity particularly in these uncertain Brexit times.

In some instances, both spouses may have been involved in building a business and both may have the same intention to remain actively involved. In others, one spouse may lack knowledge of the operation of the business and its assets as the business only involves the other spouse. Alternatively, one spouse may have established a business interest prior to the marriage, or inherited it, or perhaps there has been substantial growth in business post separation. Sometimes, almost from the date of separation, there appears to be a decline in the business, much to the suspicion of the other party! If so, there needs to be careful analysis of the person’s lifestyle and standard of living and declared financial position to ensure that there has been full disclosure of all assets both jointly and solely owned and that assets are not being hidden.

Often the main income of the parties is generated by those business interests and as such will be essential in meeting the parties’ needs following divorce.

So how does the court begin to deal with such assets? The principle is that both parties usually claim to have an equal share in assets acquired or built up during the marriage, but less so for assets acquired before or after the marriage known as non-matrimonial property. If however there are insufficient assets to meet the parties’ needs without recourse to that non-matrimonial property, then those needs will take priority over any argument about what is and is not matrimonial.

Firstly, it is vital to establish what value should be attributed to the business interests, and secondly to consider how to deal with that value along with all other assets available to be shared between the parties.

Clearly establishing the value of the business is crucial to the negotiations, and the expert will need to consider liquidity – can money be withdrawn from the business in order to pay the other party without destroying the business. Alternatively, can the business support periodical payments (spousal maintenance) to the other party.

So how is the business valued? Do you need an expert accountant to provide that valuation? Where possible it is preferable to jointly instruct an expert accountant. Their findings are then accepted by both parties in any court proceedings. A professional single joint expert valuation is more likely to be accepted by a court than an estimate put forward by the owner or his or her own accountant, or indeed lawyer. The appointment of a single joint expert saves substantial costs, and possible arguments between various experts. If your business interests are complex, an expert’s assistance is vital in understanding the information that may be supplied by the owner, and advising on tax implications. This is particularly important where it is envisaged that assets may be sold to fund a settlement.

There are various methods of valuation, but essentially the aim is to assess the appropriate value a willing buyer and seller would pay on the open market. Depending upon the nature of the business, one of the methods may be preferable to another.

  1. Net assets – e.g. suitable for investment businesses
  2. Earnings – e.g. suitable for a trading businesses
  3. Industry practice – rules of thumb – retail etc
  4. Valuation of individual shareholdings

Whilst there are various methods employed in valuing businesses, in essence the valuer will look at historical performance, risk, cash flow projected profits and how the business is managed.

Once the valuation has been prepared, consideration can be given to liquidity, as the value of the business clearly differs from a cash asset. A discount can be applied to illiquid assets being retained by one spouse, against realisable assets (such as property, investments etc.) being retained by the other.

Another consideration is transferring shares held by a co-owner in a business to the other spouse. This avoids the ongoing involvement of separated spouses who are both shareholders in the same business. If those spouses decide instead to be co shareholders then it is imperative that there is a tightly drawn shareholders agreement preventing either from acting improperly and this would require detailed advice from a corporate lawyer. If however there are 3rd party shareholders, they could potentially object to any transfer of shareholdings, and it is vital to consider the Articles of association at an early stage for any restrictions. In such instances, it would be preferable to look at other means of satisfying claims.

So is it likely the business will have to be sold? The court does have the power to order a sale of a business.  However, the money it produces will still be required post divorce. Whereas in the past it was looked at as ‘the goose that lays the golden egg’ and must be retained, more recently the court has said that this is an old taboo and that ‘the goose may well have to go to market for sale’. Despite that comment, the business in the particular case was not sold, and it is still extremely rare. If a party claims a share in the others business, he or she would have to show how their claims could be met without damaging the business. If however, there are sums or assets that could be released without negatively impacting upon the husband or wife’s ability to run the business then these should be given close scrutiny, along of course with any tax implications.

Another issue to consider is that of whether the business owner has made any loans to the company which could be repaid allowing a lump sum to be paid to the other party. This could be from funds in the business or by the business taking out a loan to pay off the other spouse’s claims.

Clearly the business is just one factor to be considered in amongst other assets, such as property, investments, pensions, debts, income and needs. All must be fully disclosed before any agreement is reached.

This is merely an overview of the process and not meant to be any substitute for detailed legal advice.

At Thursfields our family law team are experts in dealing with all types of financial issues arising from divorce and separation. For further advice tailored to your individual situation, contact us on 0345 20 73 72 8 or info@thursfields.co.uk

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