Divorcing when one or both spouses own a business can introduce complexities into the financial settlement process. We often field inquiries from clients wondering how to access their spouse’s business assets or concerned about protecting their own business from claims.
Courts are generally reluctant to place business owners in a situation where divorce could jeopardise their business. For instance, if a court order mandates a lump-sum payment that requires selling part or all of the business, this isn’t seen as a favourable long-term solution. Instead, courts prefer alternative methods to handle these situations.
One approach is to negotiate an agreement that offsets the value of the business against other assets, such as equity in the matrimonial home, savings, ISAs, or pension provisions held by either party. This strategy aims to find a fair resolution without resorting to selling business shares or assets.
How is a business treated in divorce?
Often, one spouse may view their partner’s business as a valuable asset, both in terms of its capital worth and potential income, and want to ensure it’s factored into the divorce settlement. Conversely, the business owner may resist the idea of having to sell shares or secure substantial funds against the business, which could disrupt their income stream or impede the business’s future growth and operations.
Targeting the business as a primary asset in a divorce settlement can sometimes be unrealistic and shortsighted. While the business holds inherent value, it primarily serves as an income source for the family. If the business is forcibly removed or burdened with excessive debts, it could jeopardise not only the business’s performance but also impact future maintenance payments for the spouse. Therefore, it’s essential to approach business assets within the context of the overall financial settlement with careful consideration for the business’s ongoing viability and the long-term financial stability of both parties involved.
Valuing a business on divorce
The most effective approach to dealing with a business in a divorce settlement is to view it as a positive asset for both parties and agree on a realistic valuation of the shareholding, taking into account all relevant factors. For instance, if one partner holds a minority shareholding, this will naturally impact the valuation.
It’s crucial to agree early on the income generated by the business over the past few years and to take a realistic view of future income prospects. Avoiding situations where exceptional or atypical business performance skews negotiations is important; a longer-term perspective is advisable.
Once realistic figures for the shareholding value and income are agreed upon, progress can be made on capital payments related to the shareholding’s value and any maintenance payments based on need and affordability.
Double accounting should be avoided at all costs. This occurs when a spouse attempts to claim against both the value of the partner’s business share and their income derived from that shareholding.
Involving the courts may be necessary to determine the business’s value and its impact on the settlement. Therefore, it’s vital to engage a specialist family lawyer early in the process. They can provide guidance on the appropriate approach, such as whether to assess the business value based on dividends, assets, or other criteria.
Assessing business value can be complex, depending on factors like its structure (limited company, partnership, sole trader) and the intertwined nature of the business and the individual running it. In many cases, separating the business’s value from its owner’s contributions can be challenging.
How to use the business value in a settlement
Once a suitable approach is chosen, the next step is to address how to fund the settlement, which can vary significantly from case to case. Factors to consider include the liquidity of the company, outstanding debts, ownership shares held by the parties, and any salaries drawn. In some cases, selling part or all of the company may be necessary to generate the capital required for the settlement, particularly if other funding options have been exhausted.
While a 50/50 split of assets is often a starting point for settlements, it’s important to recognise that the court considers multiple factors beyond a simple division. These factors include the duration of the marriage, the welfare of any children, and future income prospects.
Additionally, emotional distress stemming from the divorce can affect productivity, which is another important consideration in business-related divorce proceedings.
Added complications
In certain cases, a spouse may have a direct role within the company, and a divorce could result in their departure, impacting day-to-day operations. Alternatively, the spouse might have a more passive role. Historically, it was common for a spouse to hold the position of company secretary, primarily in name only. However, given the official nature of this role, removing them requires agreement from the company’s other directors, and Companies House must be notified to prevent future claims or liabilities related to the business.
It’s essential for parties to collaborate and realistically assess the business’s value both in terms of capital and the owner’s future income-generating capacity. This approach is key to achieving a successful financial settlement for both parties involved.
Avoid putting your business at risk
At the beginning of a relationship, family business owners are often encouraged to establish a prenuptial agreement. This process clarifies entitlements related to the business, minimising confusion in the case of divorce. When prepared correctly by a specialist family lawyer, a prenuptial agreement can be highly beneficial, as courts will consider it when making judgements.
