Divorce Advice For Business Owners

A sole trader is a person who has complete control over the business. In this case, the owner controls all the business assets but is also responsible for any liabilities or debts. Here, income and profitability are the most important things to consider.

When other people own part of your business - whether it’s your ex-partner or a third party - valuations get more complicated. This is when you may need expert help from a specialist accountant, business valuation expert or financial advisor. If there are other owners, they need to be informed of your divorce right away.

If only you and your ex-spouse own all the shares in a private company, it makes valuation more straightforward. Where there are other shareholders to consider, it becomes more complicated, and you may need to call in specialists.

On divorce, many people worry that they will lose their business. While the court has the power to order a company owned by either party to be sold, this isn’t necessarily the most desirable outcome. Often the court will let the owner keep the business and compensate the other spouse with a larger share of other assets or spousal maintenance.

It’s unlikely that the court will instruct you to sell the business if it provides the main source of income, especially if this income is needed to fund spousal or child maintenance. That’s why there’s no need to worry that your business will be damaged to the point where it is no longer viable as that would be counterproductive for both parties involved.

In the rare circumstance of a business sale, the court will strive to mitigate the financial impact by allowing time for a suitable buyer to be found at a reasonable price.

The safest way to ensure the protection of your business in divorce is to plan ahead, and enter a prenuptial agreement when you get married in the first place. This will allow you to outline what would happen to the company in the event of a separation, and agree on the terms with your spouse ahead of time.

If you have not drafted an agreement at the start of your marriage, you may also enter a postnuptial agreement after the wedding, which would effectively achieve the same outcome.

In England and Wales the divorce courts strive towards equal division of assets. Even if one person was directly instrumental in running the business the other spouse may be entitled to a share, particularly if they can make a case that they had an indirect involvement in the success of the business or that it is in effect a matrimonial business.

It may be possible to keep a business separate from the financial settlement if the business forms part of an inheritance or was established prior to the marriage, but this is less likely if the proceeds were used to support the couple during their marriage.

When it comes to splitting business assets the court is flexible and can share the income or divide the shares between the divorcing couple.

When assets are illiquid, such as tied up in a business, their value may be offset with other assets. Ideally, the court won’t leave one person with assets tied up in a business and the other with cash as that could be considered unfair. The Court will try to share as equally as possible all of the assets in the case, taking into account the principles of need and sharing.

A business can be considered a matrimonial asset, however there are some factors which may affect this.

Assets acquired before the relationship or marriage started are not generally considered matrimonial assets. This is because the courts will attempt to establish a fair outcome that serves the needs of both parties, while making a distinction between what each spouse owned outside or prior to the marriage.

Businesses can be a more complicated topic, as they are not only an asset that is bought at one point in time, but rather they are continuously run and generate value over time. If the business has been run and created revenue during the marriage, it is likely it will be considered a matrimonial asset.

Often in a family business, the consent of both parties is required when making decisions that affect the company, as both spouses are involved in the business. This can make it difficult for the business to function during a divorce. Therefore, it’s essential to get legal advice early on so that temporary arrangements can be made to maintain the smooth running of the business.

It’s normally unreasonable to expect a couple to continue working together once they separate. This is an issue that would need to be considered at an early stage and interim arrangements put in place while the longer-term outcomes are considered.

If the incorporation documents of the business allow for it, the court can order the transfer of ownership. This can be done by one party buying the other out or the company itself buying back the shares. The advantage of this solution is it provides a clean break.

There are tax implications and consequences to transferring ownership. Depending on when you transfer the shares in relation to the date of separation determines who is liable for the Capital Gains Tax liability that arises on the transfer. We can guide you on the best way to achieve the most favourable outcome in your situation.

To effectively deal with a company during divorce you will need to provide information relating to the value of your business or company, even if you are not the sole owner.

At Rowlinsons, we can help you to attain an accurate valuation backed up by evidence from the accounts and, if appropriate, a statement from your accountant.

Valuing a company can be complex as there are various elements to consider. This includes share value, any money that could be raised to assist with the settlement, company assets, pensions, and sustainable income going forward.

If you own shares in a company, the net value of your shareholding will be considered, and your shares will be valued on the basis that you are selling them.

Determining the value is rarely straightforward as the profitability of a business can change due to different factors. A business that was profitable in the past, may not be worth as much now. Sometimes owners can be optimistic about the profitability of their business, or conversely, they downplay the profitability of the business. That’s why you need experts on your side to unravel the finances of a business to discover its true value.

We can also assist with the instruction of an expert to value a business for the purposes of divorce proceedings. We will discuss with you the options available and the choice of expert, as well as the information the expert will need to provide a formal and accurate valuation.

Sometimes you might not be able to agree on the value of the business, especially if one party wasn’t involved in the running of it.

If an agreement cannot be made based on the valuation provided an independent expert may be used to delve further into the finances of the business. An independent expert whom you jointly instruct will look at the value of your business and how much money you can raise to assist with the settlement of sustainable income.

There is an art to valuing a business and different experts will have different methods. That’s why it’s essential to make sure you engage the most suitable expert for your situation.

It is not advisable to attempt to sell your shares at a reduced price to a third party in order to reduce the amount of assets included in the financial settlement. Any disposal of assets sold under value within three years of the divorce can be set aside by a divorce judge and the onus will be on the person who sold them to prove they weren’t undervalued.