All assets owned by a married couple divorcing are regarded as resources to meet their reasonable needs. That includes businesses and if the business is not a company, the assets of the business, not just the shares.
Valuing a family business on divorce can be a complex process, but understanding the principles and considerations can help you navigate this situation:
When can a business be looked at if you are splitting up?
In England and Wales which is the jurisdiction governing divorce in either of those parts of the UK, the interest owned by the party divorcing or separating is usually taken into account, which involves taking an overview and valuation of the entire business.
Businesses may be active cross-border, but a business which has an identity, such as a partnership or a company will have a ‘place of business’ which will usually determine issues of jurisdiction and what powers the court has to deal with it directly, rather than take a value into account.
How Courts Handle Businesses in Financial Settlements
Ideally, courts leave the business owner with the business and compensate the other spouse with a larger share of other assets or sharing income from the business.
There is flexibility and income sharing from the business can be achieved in a number of ways, if that is deemed appropriate.
As it is unfair to put all the risks on one party, Courts avoid leaving one person with all cash assets and the other with just business-related assets. Some package needs to be devised to share risk as well as resources.
How do courts and negotiators approach valuing a business?
The assumption should be that if you and your ex-partner own a business outright or have significant shareholding, it will usually be valued for calculating the financial settlement.
For shared business interests, either of you can arrange a valuation as you both have ownership and can access the records of the business and know what somebody looking at it would need to know to reach a fair opinion.
The value of a business is not a fixed sum other than if it is sold – it is expert opinion evidence and so the value is unresolved unless agreed or the mechanism for valuing has been decided by a court.
In reality, all assets are worth what somebody will pay for them and an expert can only give an informed opinion based on what they find out about the business. If a business is really only the skills of the proprietor, then it really has little value without that person and could be properly described as ‘an earnings vehicle’ not as a free-standing asset in itself.
When looking at a business there are a number of considerations which usually need to be taken into account.
- Assets: Such as property, equipment or stock owned by the business.
- Earnings: Expected future profits based on patterns of trading
- Structure: Whether it’s a limited company, sole trader, or partnership.
There are a number of acceptable ways to value businesses and even if a method is valid, it may not be the right method to value that particular business.
As getting an expert to value a business can be complicated and costly, legal advice is essential before seeking an expert valuation.
What are the different Business Structures people use?
As mentioned above, the structure of a business affects its value and also determines what a family court can do about it.
The owner controls business assets and is personally liable for debts.
A sole trader should keep proper records and distinguish between business income and expenses, but the way a sole trader works is variable: some people are scrupulous about distinguishing business transactions and personal transactions, but even without dishonesty, some people are poor administrators and may not have proper accounts prepared by an accountant or bookkeeper.
With a sole trader, there is no ‘business’ as a discrete entity – it is a sum of the work factors of the proprietor both good and bad. It may be in some cases that no value can be ascribed to such an earnings vehicle and the expense of an expert valuation is not justified.
Some sole proprietorships will have assets and a reputation / identity which will bring future custom: that ‘good will’ which would need to be valued – especially if there was a trading identity and brand.
The format of sole trader is used by many people, even if it may not represent the most tax-efficient way to do business.
What is a Partnership
A partnership is where more than one person work together and share the rewards outside of a company structure. A partnership has an identity, but partnerships arise from what people do together and not just from having a formal Partnership Agreement.
Partnerships can be a very serious and considered business which would need expert valuation – of the business and of the person’s share. The assets of a partnership are in the name of one of the partners, but the other partner(s) also have a legal interest in that asset, so on divorce, a court would need to know what assets were privately owned and which (if any) were owned by the partnership and just nominally owned by that person.
Partnerships can be challenging to properly understand so legal and accountancy advice maybe necessary.
What is a Limited Company
A limited company exists in its own right. It is a legal ‘person’ and can own assets.
A company issues shares and the share-holders are the owners of the company.
The company pays the shareholders a portion of the profits and that is called a ‘dividend’ because the profits are divided by the number of shares.
There are many issues about companies and they are governed by company and commercial law, not by family law.
Shares may be a very small portion of an international conglomerate or a controlling interest in a small business. In the case of a shareholding of a public limited company, the value is the published share price, but with small companies, there may be factors to consider including restrictions on the shares changing hands or the shares being linked to working in the business.
A court can transfer property which includes shares, but the family courts cannot override company law and it is important that legal advice is sought when there is a significant shareholding.
What might my Personal Considerations be?
Keeping your family business after divorce is a significant consideration.
Ownership and Control after divorce
If you are the sole owner or in a partnership, you have more control over the decision-making than being employed by somebody else. The success of the business and your future earnings stream is controlled by you to whatever degree you had control before. You can continue running the business without interference and if there has been a clean break order and you do not pay child support either (for whatever reason makes that proper) then you can put the effort in and retain your rewards without accounting to your former partner.
If you have your own limited company, it remains an independent entity after divorce. If you have a high enough shareholding then you may retain what control you had before. If you are a Director you play a crucial role and if your ex-partner held an office in the company or has a shareholding, you will need to negotiate with your ex-spouse and probably need specific legal advice..
Some people continue to work in the same business after separation and divorce. If you are co-parenting then lessons from that experience can be brought in to running a business together. In the long run, you will probably want a formal agreement outside of family law about the business and you should consider that necessity alongside issues about value or ownership.
How can you summarise that briefly?
Business assets form part of the pool of resources available to meet needs.
The structure and ownership of a business are important considerations when you and if necessary a court looks at the situation to devise a settlement.
There is flexibility in the system, but limited companies exist outside of the family and are governed by company law.
Expert input is often needed for businesses, even for sole traders and the right professional advice lowers your risk of making mistakes.
Always remember that a valuation is expert opinion, not fact.
Seeking legal advice and professional valuation services is crucial during a divorce especially involving a family business. Each case is unique, and expert guidance ensures a fair and accurate assessment of the business’s value is part of the process of devising an outcome which meets the needs of all involved so far as is possible.
Remember, every situation is unique. Legal advice tailored to your specific circumstances is essential. Open communication with your ex-spouse and a clear understanding of your business’s value will help you make informed decisions.