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A breakdown of a marriage or civil partnership is, for many, a very difficult and stressful time. This can be especially true for a business owner, whether their estranged spouse is also an owner of the business or not.
It is not uncommon for business assets to make up a substantial proportion of the total matrimonial assets. Protecting your assets is often a key objective in the divorce progress and therefore any business owners are likely to be very concerned at how a divorce/dissolution will impact their business.
During a divorce in England and Wales, all assets that have been acquired by the couple during their marriage are typically considered part of the matrimonial pot and are subject to division between the two parties. This includes any business assets that either spouse owns (separately or together) or has an interest in, such as a business partnership, shares in a company, or sole proprietorship. At Stephensons our team of expert divorce law specialists are experienced in advising business owners of divorce. Call us on 0161 696 6193.
The starting point for a court is the aim of a 50/50 split of all matrimonial assets based on the sharing principle. This division can be weighted more in favour of one party than the other with reference to several factors for example (but not limited) the specific needs of the parties, the arrangements for the childcare and the children’s needs, health, length of marriage, age of the parties and future resources of both parties and earning capacities.
Once the court has considered all relevant factors to that specific case, if they cannot establish a division of matrimonial assets that would be fair to both parties, then it will be necessary to include non-matrimonial assets. Ultimately, where an agreement cannot be reached between the parties, it will be up to the discretion of the court as to how all assets are evaluated and thereafter divided between them. A business asset owned by one party alone, is often a non-matrimonial asset.
On the breakdown of a marriage or civil partnership, parties are encouraged to try and reach a settlement outside of contested court proceedings as to how their finances should be settled, provided a settlement is reasonable and fair and both have obtained (or had the opportunity to obtain) independent legal advice. The court should be asked to consider the terms of agreement reached between parties by way of a consent order being filed for approval. If the court is satisfied the agreement is fair and reasonable then it will be approved, and the terms of settlement will be legally binding of both parties.
Often a business asset or interest makes up a substantial amount of the total assets and therefore how they are treated on divorce is of huge importance to a business owner.
There are multiple ways for a business to be structured and this will affect how it is treated during a divorce as set out below:
As they have an owner who is liable for both the business’ assets and debts, this is generally the easiest business to value during divorce proceedings as there are no other shared interests aside from that of one of the parties being divorced. The finances, assets and debts are therefore easily applicable to an individual.
Whilst for small businesses it may be possible to agree on the value of a business without the help of an independent financial appraiser as your family will likely know a great deal about the workings of the business, it is always advised to seek independent financial advice before agreeing to any formal valuation of your assets during a divorce.
Business partnerships are very likely to need to be professionally valued by a financial appraiser to work out what the business is worth as well as what the individuals stake in the business are worth.
The assignment of a value to a limited company depends on how many owners there are and what percentage share of the company the divorcing individuals own.
A court does try to limit the impact of the divorce on other shareholders of the business, but ultimately the court can rule on the sale or transfer of shares of a limited company during a divorce if needed to achieve a fair settlement.
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A business valuation is often an expensive undertaking. However, it is important that you receive an accurate report on what a business is worth, regardless of whether it is owned by one or both of you, to ensure settlement reached is fair.
The usual method of valuing a business is for both parties to instruct a single impartial financial appraiser to act as a single joint expert. This is much less expensive and time consuming than each party instructing their own financial appraiser.
Given the illiquidity of a business asset in the context of divorce, business assets should not just be valued the same as for example a residential property. For a property an estate agent/surveyor will value the property and the net value after deduction of mortgage and sale fees will be recorded as the asset value. It can be easy to take this approach for a business.
A financial appraiser should however look at all business assets, earnings, and how it is structured to come up with a precise, up to date valuation that takes into account profit that is expected in the future. Valuations will also take into account growth potential and any intangible assets before coming up with a final sum.
There are many ways businesses can be valued including earning multipliers, discounted cashflows, and asset-based valuations.
In many cases, expert evidence will also be required to advise specifically on liquidity, methods available to extract funds from the business, and the tax consequences of these options.
It is important to remember that the value the court assigns to a business of any type may not be treated as equal to the weight of other, more liquid assets due to the complex nature of a business structure.
Yes as a business owner you can still sell your business if you are going through a divorce, unless the court has made an order preventing a sale, usually on an application from the other party if they are concerned you are seeking to dissipate assets. The divorce does not impact on the actions a business owner is usually able to take with regards to the business.
The profit from the sale of the business however can be treated as a matrimonial asset and therefore a non-owner could be entitled to a share in the profit.
If the business is owned by both parties, the consent of both will be needed to sell the business.
Whilst you cannot usually keep your business interests out of the divorce settlement, you can protect your business in a divorce as follows:
Yes, it may be possible to do this, but it is dependent on what the other circumstances are and what might be offset in order for you to ring-fence your business.
Operating a family business during a divorce can frequently raise complex and emotional issues from the day to day running of a business to longer term important decisions.
In theory it is possible to continue to operate a family business after separation. This does require a very positive working relationship and for you and your spouse to have maintained a level of trust between each other. A very clear and well-defined shareholders agreement will be required.
In practical terms often the continuation of a business asset is not the best solution for married business partners when they separate. Simply put any animosity or contention as part of the separation process is likely to negatively impact the performance of the business.
The court will generally try to have a clean break between parties. The court will also try to preserve a family business where possible so will tend to leave the business with the business owner or the party who has more involvement with the business and give the other spouse a larger share of the other assets or explore whether funds could be raised from the business to buy out the spouse's share.
A business can be started but it may be included as part of the of the matrimonial assets even if you have been separated before starting the business.
From start to finish, a divorce can potentially last over a year, sometimes over two years. During this time, financial positions can change, and opportunities arise resulting in ownership or shareholding of a business. To try and ring-fence the business in a divorce settlement then you will need to seek legal advice. A separation agreement could prevent the other party claiming any part of the business.
This will depend largely on the structure of your business and how well the business is performing at the time. The court has the power to make a variety of orders in respect of a business as follows:
The transfer of shares from one party to another in respect a company - This often happens where both parties are shareholders in the business and the share of shares is in accordance with the “clean break” principle, namely that former spouses should settle their financial affairs in a way so that financial relations between them completely come to an end.
It is rare for shares to be transferred to another party if only one spouse owns the shares as this is in contradiction to the clean break principle as it would further entangle the financial affairs of the parties. Secondly, it is likely to cause disruption to the business and possible financial difficulties if the new shareholder was unfamiliar with the business or have sufficient experience in business management.
On occasion however the court does transfer shares to a non-shareholder where the business makes up such a significant portion of the assets that a fair and reasonable settlement could not otherwise be met. In these instances, a shareholder’s agreement may be needed.
The payment of a lump sum to the party who is not a shareholder in return for the shareholder retaining their interest - Usually, an accountant or financial appraiser will be required to advise on the liquidity for the business of such a settlement as this can impact how the payment terms are structured, particularly when the business forms the large portion of matrimonial assets and income.
Periodical payments - If a lump sum cannot be paid, for example where there may be insufficient capital to pay the required amount, a court could order that periodical payments (spousal maintenance from one spouse to another) are made. These payments can be made in part payment of the total amount required pending a sale of the business or refinancing to raise the balance of the lump sum.
The sale of the business - As detailed below.
In short, the court will generally wish to avoid order the sale of the business, unless there is no other way for them to achieve a fair outcome. An alternative will always be considered, for example a lump sum order plus periodical payments to the non-owner spouse so the business can be retained where there is insufficient funds to pay a larger lump sum; or the payment of substantial periodical payments from one spouse to another rather than having a clean break. The court can also consider in the event of non-payment of the periodical payments whether there should be a default clause in any order for the transfer of the shares equal to the value of outstanding sums.
By their very nature a business asset such as shares in a company or an interest in a business are highly illiquid. Subsequently, if a significant part of the matrimonial assets derives from business interest, such illiquidity can make it difficult to achieve a clean break.
If a sale is ordered, as much time as possible is often provided to the spouse with the interest to dispose of, to ensure the underlying foundation of any order can be met. The settlement terms will also have to have consideration of the costs of sale and any potential tax consequences, particularly in relation to capital gains tax.
The courts have and will try to utilise various methods where it is either not practical or desirable for a business to be sold, however if there is no other option then yes, a business may have to be sold.
Business assets that are owned by just one spouse will not be excluded when consideration is given to the settlement of assets on divorce / dissolution.
It should be noted that because the value of the business usually reflects potential income on a ‘profit earnings ratio’ basis, the party with ownership of the asset should highlight that the settlement does not double account to the non-owner. There is a risk of this happening where as well as a capital share the non-owner may also make a claim for periodical payments (spousal maintenance) from the owner spouse whose income is solely (or largely) generated from the business profit.
Whilst companies are usually viewed as their own separate legal entity and independent from their shareholders, in certain circumstances, the court will ‘pierce the corporate veil’ of companies that a party has an interest in, to treat its assets as matrimonial assets.
There is no automatic guarantee of a 50:50 share of a business and there are various reasons why your spouse may not be entitled to half of the business or business interest upon divorce.
When considering business assets, the court will typically take the following factors into account:
The value of the business - which usually involves obtaining a professional valuation. This value will be used to determine the proportion of the business assets that each spouse is entitled to.
The contribution of each spouse - The court will consider the contributions that each spouse has made to the business, both financial and non-financial. For example, if one spouse has played a significantly larger role in the success of the business, such as providing expertise or working in the business full-time, this may be taken into account when determining their share of the business assets by way of compensating them for their unique or significant contribution.
The needs of each spouse - An assessment of the specific needs of each spouse and any relevant child will need to be undertaken by the court (this will include their income, earning capacity, and financial obligations) when determining their share of the business assets.
The welfare of any children - If the couple has children, the court will consider the impact of the division of business assets on their welfare.
It is important to note that each case is unique, and the court will consider a range of factors when determining how business assets should be divided. In some cases, it may be possible for the couple to reach an agreement outside of court through mediation or negotiation.
A company will need to ensure there is legal clarity on the ownership of the business and the rights of the shareholders. A shareholder agreement defining what would happen if one shareholder had to sell or transfer their shareholding is essential (the granting of pre-emption rights for example).
A business asset will usually be considered by the courts as part of the relevant assets of a relationship during divorce or dissolution. It is therefore essential that any potential issues relating to business assets need to be advised on at the earliest possibility in order to prevent any of these issues impacting the assets of either spouse.
Given that business assets can cause complications during divorce proceedings all business owners should consider making a prenuptial agreement, which the courts are now placing more weight on when considering finances upon separation.
If you would like further information or legal advice in relation to business assets in divorce proceedings please contact our specialist team on 0161 696 6193.
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