Legal Advice on Business Assets on Divorce
The treatment of businesses on divorce is a complicated issue and a number of factors will need to be considered when deciding how it should be dealt with as part of any financial settlement.
Where a business has been established during a married couple’s relationship, it will be usually considered a ‘matrimonial asset’ which is subject to the sharing principle on divorce. That’s not to say the outcome would be that the business would be sold and the proceeds divided between the parties. If possible, the aim should be to enable the party who runs the business to continue to do so, whilst compensating the other party in some way. This can include a larger share of the other matrimonial assets, maintenance payments or in some cases the transfer of shares in the business.
Business Valuations Relating to Divorce
In certain circumstances, defending divorce proceedings may be in your best interests:
An initial business valuation may be undertaken by the company accountant if appropriate. However, in most cases where it has been determined that a business is to be valued, this would usually be carried out by a single joint expert (SJE) who is appointed jointly by the parties to the divorce.
Valuations are complex and there will be a number of considerations such as:
- Income generated from the business both now and projected;
- The standard of living that the business supports;
- Assets within the business such as property, vehicles, machinery etc.
- The value of business pensions;
- Whether or not it is possible to extract capital from the business;
- Whether or not it is possible to borrow money against the business or its assets;
- The ownership structure of the company and whether the party who has an interest in it is a majority or minority shareholder.
In light of the complex nature of business valuations, specialist accountant advice should be sought.
Business valuations are not always necessary or appropriate and if parties agree on the value to place on a business, this will save the expense and delay of appointing an SJE.
How does the business form part of a financial settlement?
Once a business had been valued, there are a number of options available to determine how it should form part of any financial settlement and this may depend upon factors such as who are the shareholders? Does one party own all of the shares or do both parties have an interest? Is the party with an interest a majority or minority shareholder?
When considering how to deal with business assets, consideration should be had to issues such as:
- Risk vs. reward
- Avoiding double counting – for example, if a spouse is to benefit from both a capital sum from the business and also ongoing spousal maintenance
- Any discounts applicable
- Not interrupting the performance of the business
- The potential to extract capital from the business
- Achieving a clean break
Some of the options available when considering how the business may form part of a settlement include:
- Payment of a capital lump sum to the spouse who is not retaining the business;
- Sharing the income from the business by way of spousal maintenance;
- Transferring shares to a spouse and paying them dividends from the business;
- A combination of a series of lump-sum payments and maintenance;
- Awarding the non-business owner a greater share of the other available assets.