Relationship breakdowns, whether they be of a marriage or civil partnership, can be painful and complicated. Despite the recent arrival of the ‘no fault’ divorce, the division of assets can still be a bone of contention. This can be particularly so when business interests are involved, and questions are often asked: Will my business be included in the divorce settlement? If so, will I/we need to sell it?
Though it’s not always cut and dry, this article tries to answer these questions and more.
Are business interests considered matrimonial assets?
In England, Wales, and Northern Ireland, the business interests owned by either party during a divorce will generally be considered by the court as matrimonial assets. This means that their value will, therefore, be added to the matrimonial pot when dividing assets, irrespective of which spouse founded or ran the business.
Could I lose my business during a divorce?
The court is not in the business of destroying a business. Generally speaking, if the business was founded and then subsequently managed by one spouse alone, then the courts will normally endeavour to ensure this party retains their business in full. Often this is the individual’s only or main job, and so by dividing the business or forcing them to sell, it could mean stripping them of their livelihood. It is unlikely the court would see this as a sensible or fair outcome. Also, a business can be successful – providing a good income – but has little or no actual value, and the court will rarely undermine working capital.
In cases like this, the business owner/manager will most likely give up alternative assets (for example, their portion of the marital home) instead of having to share the business interests or divide the assets with their spouse.
An issue may arise, however, if there are insufficient alternative assets to cover this. It may then be necessary to transfer a certain number of shares from the business to the other spouse or to decide to share the business’s future income.
In these cases, it is unlikely that the court will order a business to be sold in order to divide the money raised by the sale between both parties, although it does have the power to do so.
What if it’s a family business and both parties contribute to it?
When both parties contribute to the business – possibly as company directors with equal shares – then it can be more complex.
If the split is an amicable one, both parties may be able to carry on in their roles as business partners, or one spouse could retain their shares in the business but become a ‘sleeping director’, allowing their ex-spouse to manage the business day-to-day.
If neither of these solutions is desirable, one spouse could sell their shares in the business to their ex-partner (husband, wife, or civil partner), or to a completely new director/business partner.
If no solution can be reached, however, the divorcing couple will either need to sell their business and divide the assets or ask the court to decide.
How do you value the business?
If the business is owned by one spouse – either outright or with business partners – then that party may arrange the valuation. If the business interests are shared by both divorcing parties, either can arrange the valuation.
However, this process is rarely straightforward, especially if the business is privately owned. The valuation process will need to take into account the business’s assets: cash reserves, premises, vehicles and stock; it’s previous earnings and projected profits; it’s debts; and the business’s structure – i.e., whether it’s a limited company, sole trader, or partnership.
The valuation process can also be expensive, and divorcing parties may disagree on the valuation of the business, so it’s advisable to get legal advice before the whole process begins.
What if we disagree on the valuation?
If you dispute your partner’s valuation, you can ask your solicitor to look at the company’s books and advise on whether it warrants further investigation.
The use of specialist accountants to do this can be costly however, as the process can be very complicated and time consuming – particularly if the company’s books are disorganised or the business interests being investigated are complex.
To avoid this in the first place, both parties could agree on a single joint expert, who is independent and can provide an impartial valuation. However, it is still wise to involve your solicitor in this process from the very start to make sure you are given the best possible advice.
Here at Hutchinson Thomas, our aim is always to achieve a timely and cost-effective outcome that is sympathetic to each individual client’s needs. We have considerable experience and well-tested expertise in handling ‘high value’ and financially complicated divorces, often involving business assets and inherited wealth.
If your relationship has broken down and you need help and advice on reaching a settlement contact Robert Williams, Senior Partner at Hutchinson Thomas, on firstname.lastname@example.org or call 01639 640 152.