When a business needs to be included in a financial settlement, one question we are very often asked is how a business is split in a divorce.
While there are of course exceptions depending on the exact circumstances surrounding the divorce, businesses (and the financial value of that business) will usually be split in the same way as the finances, property, pension, investments and other assets, even if one party has never worked in the business.
However, the more contentious issue isn’t whether a business can be split in a divorce, it is how it will be split.
This will come down to an agreement on the business’ value and a decision on what will happen to the business going forward. It is quite common for the principal business owner to be left with the business while their partner is compensated with higher maintenance payments or a larger initial payment or share of the other assets.
How do you value a business in a divorce?
Irrespective of whether the business in question is a PLC, a limited company, a partnership or a sole trader, whether it is a large, medium or small entity or whether it is owned by one spouse or both, an agreement on the company’s current value must be reached.
Without a valuation, it will be impossible to split the business in a divorce.
Valuation can be a complicated issue as there are a number of factors that will need to be taken into account including:
- Goodwill (e.g. the likelihood of long-term customers and cashflow)
- The ownership structure (will splitting the business impact other owners/shareholders)
- The business’ assets (stock, vehicles, premises, IT, machinery)
- The business’ credit position
- Any personal or company pensions and pension commitments
These also need to be cross-referenced against the income each party expects and the standard of living each needs to support.
The business owner will need to provide a detailed estimate of all these aspects of their business in Form E, backed up with company accounts and a letter from their accountant.
While this probably seems straightforward, there is the potential their partner will refuse to accept the initial valuation estimate. If this is the case, you may have to instruct an independent accountant who specialises in valuing businesses (also knowns as a single join expert) to provide their valuation of the business.
It is worth noting this can be expensive.
What happens after a business is valued?
After you have agreed on the valuation of the business, there are several ways the court might proceed.
For example, if it is owned outright by one or both spouses, it will be treated as another marital asset and split accordingly.
If the business is owned by several shareholders of which one of the divorcing spouse is one, the court will only include the value of the shareholding in the settlement.
If the business is owned outright by one party, the court will normally try to ensure they retain their business in full and instead of sharing the business with their ex, they will give them more of the other marital assets instead.
It is unlikely the court will ever insist on business being sold (despite the fact it can) but if there aren’t enough alternative assets to share, they may order the business owner to transfer a certain number of shares (if it is a limited company) to their ex as a substitute.
In the case of family owned businesses where both spouses are directors and equal shareholders, things can be more difficult.
If the split is reasonably amicable, they may be able to carry on as business partners or one could retain their control while the other trains their shares and becomes a ‘sleeping director’. Or an agreement could be reached to allow one party to buy the other one out.
If a solution still can’t be agreed, the divorcing parties will either need to sell the business or go back to court so the judge can make a decision for them.
Again, what happens next will be dictated by the circumstances so it is always advisable to be completely open with your lawyer so you can find the best way forward together and so they can explain the likely outcomes and manage your expectations properly.
This open dialogue becomes even more vital when it comes time to draw up your consent order, the legally binding document that sets out and confirms how you plan to divide your business assets for the court.