Divorce is highly stressful and perhaps even more so for people who own a
business. This is a highly complex area of law and naturally business owners
will worry about their business. Family Law Partner Sarah Atkinson is here to
explain some of this to us. Let's start with the basics; what happens to a
business during a divorce? Well they're factored in in many different ways
depending on the nature of the business. Sole traders are very easy where the
person themselves is running a business under their own name because there's no
separate entity to value. Those with interests in partnerships or companies
are slightly more complex. In some circumstances purely the income that's
generated by the business is shared on divorce and it would be unfair on the
business owner to count a capital value as well as the income stream it
generates because if you sold the business you wouldn't then have the
income stream or vice-versa, so then you'd only share the income long-term
with the spouse on divorce. If you're not going to do that and you do need to be
able to share the actual value of the business interest then it will have to
be formally valued sometimes to determine what that is if it can't be
agreed, and then share the capital value between them. Okay let's look at that
more closely, if it's necessary how are businesses valued during a divorce? The
first step would be for the business owner to produce, as part of their
financial disclosure in the divorce process, a valuation from the company
accountants because they know the business better
than anyone and are best placed to do that. Sometimes there's a level of
distrust between the spouses that means the court will appoint an independent
expert accountant to confirm the value of the business so it depends how that
process pans out really. And what is involved if an independent valuation is
deemed necessary by the court? Well we would select a single joint expert
they're called in the process and the solicitors for both parties would work
together to prepare quite detailed instructions to the accountant,
gather all the necessary documents they need to review. Those questions
raised within the instructions would be to confirm the open market value of the
business interest i.e. what would a person on the street pay for that business
interest. Secondly we look at the tax consequences of selling that interest
because the court always works with net figures, so after tax what's the business
interest worth. Thirdly it will look at the liquidity of the business interest
i.e. could the company release money to share the value of the shareholding with
the spouse? And if so how quickly and in what method? And what are the top tax consequences?
And lastly they'll look at the sustainable income of the business owner
so as part of divorce, sharing future income is sometimes done and therefore
you need to know what sustainably can be earned from the business going forward.
And what would you do with that valuation? Well the court has various
powers available to it and its primary aim on divorce is to separate the couple
financially so they each have their own assets independent of the other and
there's no future financial ties between them. So the obvious way of doing it
would be for the court to order a lump sum payment by the person with the
greater share of the assets, including the business, to their spouse to share
the overall pot between them. If that's not viable, and it's not in every
circumstance, then it's open to the court to transfer ownership of shares in a
company - which can be quite scary for the business owner and maybe their
colleagues - that can be shared in that way so that the spouse becomes a
co-owner of the business for the future and shares the benefit or the failure
of the business as they would have if they'd stayed married. And in very rare
circumstances the court could even sell a business interest to release cash to
share between them. What would happen if a spouse already owned a business
before their relationship had happened? Well the way the case law has developed
the court now categorizes assets as non matrimonial property or matrimonial
property and that matrimonial element is what's effectively built up during their
marriage partnership and that's definitely the element that would be
shareable on divorce. So the court will try and identify how much the business
was worth when it was brought into the marriage.
It's very common these days with second marriages that people have built up
wealth in this way so that's why the case law is developing in that way. And
they will often do that just by taking the broad brush approach because no one can
look back to 1988 and determine the value of the company now and back then,
it's very difficult. So they'll just apportion it over the period of time the
business has been running normally. There are various complexities to that
analysis but the broad brush answer is they will ring-fence
an element of the pre acquired value of the business. So we've learnt from Sarah
that divorces that involve a business can be very complex and many people find
it necessary to seek out specialist legal advice.