Divorce can be difficult at the best of times, but when you combine getting divorced from someone who you also own or manage a business with, matters quickly become even more complex.
Where a relationship has broken down irretrievably, the prospect of continuing to work alongside your spouse is usually a ‘no go’. In the event that you decide not to continue to work together, the remaining options are for one spouse to buy the other out, the business to be sold or as a last resort, the business may be forced to shut down. The latter option is clearly one that would be best avoided, including by the courts, as it would result in the potential loss of livelihood for both parties.
Here are some of the key factors involved in how businesses are treated during divorce.
How the business is owned
Business ownership can occur in many different formats; sometimes a couple own a business on a 50/50 basis. In other instances, it will be the family business of one spouse, with other directors or members of their family involved, and the non-familial spouse may be a minority shareholder or simply work for the businesses as an employee. A business may be owned by a spouse and the other spouse may work for the business as an employee or on a casual basis.
The timing of when the business ownership or shareholding began can also have a bearing. if the business is one that a spouse owned before the parties began their relationship, it may be possible to ‘ring fence’ some or all of it from division in divorce. Businesses that were formed or where ownership began during the course of the marriage will usually be treated as a shared asset for the purposes of divorce.
Valuing the business
In the majority of cases, ownership of a business means that the business will be treated as an asset for the purposes of a financial settlement following divorce. The exception to this is where a business is owned by one spouse and treated solely as a producer of income, without having an intrinsic value itself.
A business, however, is not a liquid asset and is treated differently from cash or investments. Extracting value in the form of cash is often difficult and it’s worth remember that there will also be tax implications.
Where a business has a ‘capital value’, an expert accountant will usually be appointed to value the business. If the business owns assets such as real estate then those assets may also need to be valued by a surveyor.
Businesses can be heavily dependent on the ongoing involvement of a key shareholder. In these circumstances, the business valuation will need to account for this.
Businesses with other shareholders
In instances where the business ownership is on a minority shareholder basis, a valuation can still be ordered. The presence of other shareholders can complicate matters as their cooperation will be needed. Where any decision is made to force the sale of the shares, the agreement of other shareholders will also be required. In some cases, the business’ articles of association may restrict the transfer of shares.
It’s important to remember that there is a duty of full, frank and clear disclosure during family proceedings, and this includes in relation to business information.
Engaging in discussion regarding a business can be emotionally stressful, and using a mediator can be helpful for both sides. Mediation generally allows for more amicable and productive discussion, thereby increasing the likelihood that a way forward that suits both parties, as well as the business, can be reached.
O’Donnell Solicitors have advised many business owners throughout divorce proceedings. Our family team work closely with expert advisers including IFAs and accountants, helping to navigate the various possible outcomes to reach an agreeable arrangement for all parties.
Anthony Jones is a Director, Head of Family and is a Resolution Accredited Specialist. For more information, please contact him on 0161 641 4555 or email firstname.lastname@example.org