How is a business treated in divorce?

Businesses can be a tricky and complicated area when it comes to getting a divorce. Regularly, I am approached by my clients who ask how they can “get their hands on” their spouse’s business assets. Conversely, there are those concerned that their partner is seeking to make a claim on their business and “ruin them” and want to make sure they cannot do this.

Often a spouse assumes that their partner’s business is worth a small fortune and they do not want to lose out on that potential asset in terms of both the capital value and the potential income that is derived from it in a divorce financial settlement.

Equally the business owner does not want to find themselves in the situation where they must consider selling their shareholding or secure substantial funds against the business. This will either remove their income stream or hamper the business in the future, limiting its ability to trade and potentially limiting its expansion or ability to borrow.

A spouse who “goes after the business” can sometimes be taking an unrealistic, not to mention short-sighted, approach. A business inherently will have a value but very often that business is a vehicle to provide an income for the family. Obviously if the business is taken away then the income will be lost and in turn any potential for future maintenance payments for the spouse will be affected. Equally, if the business is burdened with excessive borrowings, this will hamper its performance in the future and again have a knock-on, negative effect in terms of any maintenance payments made.

What must be avoided are elements of double accounting. This is where a spouse will seek to claim against a partner’s share of the value of the business, often valued by an independent accountant. Then they also try to claim against their partner’s income, when in reality the income is derived from the value of their shareholding in the business.

The most effective way of viewing a business is to see it as a positive for both parties and to agree a valuation of the shareholding, considering all the realities of the situation. This may include, for example, that the partner has a minority shareholding only. If that is the case, it must be accepted that it is going to have an impact on the valuation.
It is important to seek to agree at the earliest opportunity both the income derived from the partner’s business over the last two years or so and to take a realistic view about future income. There is nothing more difficult than dealing with a case where a company has had either an exceptionally good or bad year and seeking to agree matters on that basis. A more long-term view has to be taken.

Once the parties have agreed realistic figures for the value of the shareholding and income, progress can be made in terms of any capital payments that may be made regarding the value of a shareholding and any maintenance payments based upon need, but taking into account affordability in terms of the payer.

The courts do not like to place a business owner in the position where a divorce may ruin that business, for instance if an order is made for a lump sum to be paid to the spouse as part of a settlement and the only way to make that payment is to sell off part or all of the business. This would be in no one’s long term interest. There are several ways that the courts prefer to deal with matters. Certainly, a sale of a shareholding in a business or of a business in its entirety must be avoided unless that is the intention of the business owner.

Instead the parties can work together to seek to reach an agreement to offset against other assets for example, any equity that is within the matrimonial home, any savings or ISAs the parties may have or indeed any pension provision again that the parties may have.

In essence what must be remembered is that parties need to work together and take a realistic view of the value of the business from both a capital perspective and also the ability of the business owner to generate an income in the future. This is the secret to both parties leaving with a successful financial settlement.

Article by Richard England, family law solicitor with Woolley & Co, Solicitors