Divorce is always difficult, bringing with it many emotional, financial and practical problems. When a business is involved, owned by one, or both of a married couple, then things get even more complicated. It is even more critical than usual to appoint specialist divorce solicitors.
Instructing The Right Solicitor
If you own a business and are going through divorce, then it’s absolutely critical that you instruct a specialist family law solicitor who is experienced in dealing with issues surrounding business and divorce.
Our team of specialist family lawyers have that experience. Based at our offices in Salisbury, Fordingbridge, Andover and Amesbury they can help you through this difficult period for you and your business whether you are local or not.
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So how do the courts approach a division of business assets in divorce?
Is my business protected from my divorce settlement?
The overriding principle in divorce is that the family’s assets are divided fairly in accordance with each couples contribution. And your business is one of those assets.
Nevertheless, when it comes to business assets the courts have shown a reliance on the precedent of a 50/50 split between spouses.
However the Courts are generally reluctant to dissolve a business as part of a divorce, not least because they may be the main source of income for children involved or for any maintenance payments which must be paid to the spouse. Insisting that some of the business is sold to fund a lump sum payment to the spouse could have terrible consequences.
When dealing with business assets, the court can, however, award a 50/50 split irrelevant of contribution to the business itself. This commonly occurs in cases, which the husband is the breadwinner and the wife is a homemaker (or visa versa). It may be assumed by the court that the homemaker party has sacrificed their career on the basis of financial security received from the business assets in question. Not only this, but the non working party may be assumed to have supported the working party in their business ventures.
In situations like this, the court will not automatically enforce a sale of the business to fulfil the conditions of the split. If the business is providing a suitable income, big enough to support the ex-spouse and any family involved, then paying maintenance may be a better alternative instead. Maintenance and the sale of individual assets can also help satisfy the claims of a divorce whilst preserving the business as a going concern.
Divorce with a Business Involved – How does the court achieve a settlement?
In order to achieve a settlement, the court will need a current valuation of the business. This valuation needs to show more than just the current balance on the books; it will have to show profitability of the business and it’s potential future earnings. Not only this, but the business should be valued as both a going concern and what it would achieve from liquidity.
The court will use this information in connection with all the usual factors it considers during divorce proceedings.
Once the valuation information is obtained, both parties should attempt enter negotiations prior to taking the matter before a court. Such negotiations can happen via mediation or collaborative law. Decisions reached in this way can save parties large sums on legal costs and court fees.
Click here to read more about the benefits of family mediation.
Broadly the same issues are relevant and broadly the courts adopt the same approach in cases of civil partnership dissolution.
How can I avoid losing my business assets upon divorce?
If your business is pre-owned prior to the marriage, then it is advisable to seek protection through a UK prenuptial agreement or pre-civil partnership agreement.
However, if the process of creating your business occurred during your marriage there are certain actions that you can take to ensure that each party’s rights are defined. Examples of these measures are creating a shareholder agreement or forming a discretionary trust. These agreements can include directions to how business assets will be divided upon divorce.
If you are considering implementing any of the above protective measures, it is always advisable to seek legal advice from specialist divorce solicitors before taking any action.
Click here to read more about Prenuptial Agreements
Divorce finances and family businesses
When dividing family assets on divorce, every resource will be taken into account, including the family business. Whether the business is yours, your partner’s, or shared it will be including in the matrimonial pot whether your assets are divided through settlement or by the court.
The business will first need to be valued so that it can be determined how that value that fairly be divided between the two parties. This can of course massively affect other people involved with the business who will also be legally bound by any legal provisions made with regards to the business.
Click here to read more about Divorce and the Family Owned Business
Will the business have to be sold?
In the past, courts tended not to order to the sale of a business, instead choosing to assess its value in terms of an income provider. However this convention is changing and family businesses are no longer guaranteed the safeguards that the may previously have received from the courts.
Whilst businesses do not necessarily have to be sold as part of divorce proceedings, they very often are. It may be possible to comprehensively restructure the business in order to get avoid sale, however this is a complex process in itself. Many things will be taken into account when valuing the business, including pension schemes, the respective contributions of the parties and real estate owned by the business.
Can I sell my business before my divorce goes through?
Yes, you probably can – provided your spouse does not have a share in the business.
How it if you do sell the business, bear in mind that any cash or other assets you receive in return will still be considered as matrimonial assets and therefore up for distribution. Also be careful that by selling, you don’t reduce the value of your assets. If you do, it’s possible that the court would look upon that unfavourably and award your spouse a larger share of the family’s assets to make up for any financial loss because.
Our advice is simple. If you are thinking of selling your business and getting divorced, make sure you get good legal advice from specialist divorce solicitor with plenty of experience of divorce and business before doing so.
How is a business valued in divorce?
That really depends on the nature of the business. Some small businesses which, for example, includes many sole traders and self-employed business people, may find that there is effectively little value in their business – with that business effectively just being a vehicle for the person involved to earn a living. Without them the business may have no value whatsoever.
But other businesses will have a value and you will need a specialist valuation report when looking at reaching a reasonable financial settlement.
The normal method of valuation is for your solicitors and your spouse’s solicitors to jointly appoint an accountant with plenty of experience of business valuations. They will produce a report. But bear in mind, this kind of valuation is more of an art than a science. So it’s critical to get the right accountant in the 1st place – with, for example, some accountants specialising in valuations of certain business sectors.
Depending on the nature of your business, your accountant will consider 2 aspects- a net asset basis valuation and an earnings basis valuation.
A net asset valuation will consider the assets of the business in doing so. This is more common where the business is more of an investment than a trading going concern.
In contrast an earnings basis valuation will consider profit from trading. Depending on the sector involved, there may be a multiplier of the annual profit to reach the right valuation. Such multipliers are common, for example, with tech companies but not with law firms.
When reporting, the jointly instructed accountant will also consider the possible effect of the divorce and the business – and on any related tax issues.
Divorce with a Business Involved – the importance of early specialist legal advice
Business owners or partners who believe that their marriage is breaking down should seek legal advice post-haste in order to get the valuation process underway quickly. This way you can best protect your financial position.
When your long-term financial prosperity is at stake, it is comforting to know that the solicitors representing you are experts in their field. The divorce solicitors at Bonallack & Bishop have vast experience of the financial proceedings and can help you reach a fair financial outcome from your divorce.