Your Business and Divorce

If one party to a divorce owns a business it is important for both spouses to know how the value of the business will be viewed by the court and what the options are for dealing with this asset.

Liz Graham, Head of the Family Law department, advises on how to protect your assets if divorce is unavoidable.

On divorce a business, and the assets of the business, will be treated as part of the ‘pot’ of relevant assets to be considered when it comes to looking at what a fair division of the matrimonial assets should be. This is the case whether the assets are in the shape of shares in a limited company, an interest in a partnership or those of a sole trader.

That being said, there is an important distinction between everyday assets such as the family home, pensions or savings and those that are business assets. A business is not a liquid asset that can easily be valued and shares in a business are subject to the success of the business and so can be seen as ‘risk-laden’ assets.

Not all business are the same. The courts will draw a distinction between a company that has been formed to carry out a specific business activity, such as producing widgets, and one which is a vehicle to put assets out of the reach of tax, such as a property portfolio. With the former, the courts may accept that that the company is a legal entity in its own right, but with the latter if it can be proved that the company was the private fiefdom of a spouse then the assets may be transferred to the other spouse in any settlement.

In light of the above it is therefore important to obtain expert advice at an early stage to establish the value of the business as well as the structure and purpose of the company. In the vast majority of cases an accountant will be required to carry out a valuation and generally one accountant will be instructed by both parties as a single joint expert to reduce cost and potential for conflict.

The courts are generally reluctant to order that a business be sold, but this can become necessary if there is no other way to achieve a fair outcome. Arguments can potentially be made that a business should not be viewed as a matrimonial asset, such as in the case of inherited farms for example. However, if a sale is ordered then the spouse who is the owner will be given the opportunity to buy out the other party’s interest. This will take into account the nature of the business, including its stability or otherwise, and may allow payments to be made over a period of time to the other spouse in respect of their share so as not to put the company into a precarious financial situation.

The following considerations will be relevant to the court when deciding how best to deal with business assets:

• Whether there is a market for the shares in the company;
• How should the shares be valued;
• If the shares are to be sold, how should this be done;
• Liquidity—how money can be raised and paid out, and what the tax consequences will be;
• What the impact would be on the company as a going concern and the valuations of it if money was extracted;
• What the costs of sale will be and what capital gains tax liabilities will arise.

Contact a member of our Family Team for further help and advice.