For couples with business interests and significant assets, how these will be dealt with often forms a key part of divorce discussions. Expert legal advice helps you effectively determine the value of these assets and better divide them within the financial settlement.
The Family Law Department at Rowlinsons has experience in helping clients through the complexities of dividing business assets in a divorce. We also have a network of trusted advisors, including forensic accountants, actuaries and surveyors who can uncover assets and assist in calculating a fair valuation.
We are one of a select number of law firms that can provide a full range of legal advice on family matters and are also trained in mediation and collaborative law. This means we can review all options available to you and where possible attempt to reach an agreement out of court, saving time and money.
Divorce for Business owners
The family business is usually the most significant asset to be included in divorce proceedings. Depending on the structure of the company, valuing and dealing with your business interests during a divorce can be a highly complicated matter.
Dealing with business interests during divorce
During divorce proceedings, your business will be considered a relevant asset as part of the financial settlement. This is the case whether you’re a sole trader, you own a share in a business or have a stake in a private company. Usually, only the interest owned by the divorcing party will be taken into account, but the court will look at the overall business operations.
Assets tied up in a business are looked at differently from other assets such as property, cash, and even shares which are easier to value. The accurate valuation of a business is extremely complex as these types of assets can be difficult to split or sell.
There may also be a deep emotional attachment to your business if you’ve invested a lot of time and energy into growing it over the years.
Will I lose my business in the divorce?
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 child maintenance or spousal 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 that your business is sold, the court will strive to mitigate the financial impact by allowing time for a suitable buyer to be found at a reasonable price.
Dividing a business on divorce
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 and share as equally as possible all of the assets in the case, taking into account the principles of need and sharing.
Different types of businesses
It’s important to understand how the business is structured if you don’t already. If you were involved in running the business, you will already know the set-up.
There are three main ways a business can be structured: owner-owned, shared ownership, and stake in a private company.
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.
What if a couple owns a business or runs a company together?
Often in a family business, the consent of both parties is required when making decisions that affect the company. 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 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.
How will the company be valued?
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 are a shareholder, 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 how profitable the business is. 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.
Disputes surrounding valuations.
Sometimes you might not be able to agree on how much the business is worth, 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.
Disposing of assets
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.
Bringing in your own experts
The business owner may appear to undervalue their business. This tactic of undervaluing assets in an attempt to reduce the other spouse’s claim will be frowned upon by the court.
While the owner of the business is responsible for full disclosure of their financial situation, the other spouse can apply to look directly at their bank account or business accounts and see if it’s worth further investigation.
An accurate valuation of a business is tricky at the best of times and when the owner is uncooperative or provides a suspiciously low valuation you may have to bring in your own expert to look more closely into the financial details of a business. The Court can also order a single joint expert to value a business for the purpose of financial settlement proceedings as well if required.
Resolving valuation disputes
However, bear in mind that using your own experts is an expensive option and you can end up spending hundreds or even thousands of pounds on specialists. It may not be worth the extra cost or hassle.
The fortunes of a business can rise and fall and even if the business was profitable in the past, it may not be worth as much as you think now.
Just because you have a business doesn’t mean your case will have to go to court. You can save time and money, and even avoid going to court if you can use mediation or alternative methods for resolving disputes. At Rowlinsons, we have expert collaborative lawyers and mediators on our team to help you deal with your case effectively and amicably.