The division of a shared family business amidst divorce can present several challenges, but being able to work together to achieve a fair agreement that benefits both parties during a potentially messy divorce can significantly reduce the emotional and financial burden.
Here we look at the potential impact that divorce can have on a family business, and how to best navigate the process involved.
What is a ‘Family Business’?
A family business is generally defined as one where the individual(s) who originally founded it, or their spouses, parents, children, or heirs, hold the majority of the voting power or shares.
This essentially means that any company where family members play an active role in managing its finances, administration, or operations will fall under this category.
However, when it comes to divorce proceedings, the crucial factor is whether either spouse has a stake in the business. If the business is solely owned by the spouse’s parents or siblings, it holds no relevance to the marital assets and therefore would not be subject to division during a divorce settlement.
Even if you are a self-employed individual, it’s important to understand that your work may still be classified as a ‘family business’ when it comes to the division of marital assets. This applies particularly if you are a majority shareholder or a sole trader.
Your spouse may be entitled to a share of your business, even if it predates your relationship. However, if the business does not have substantial assets, you may be able to continue to work as a self-employed operative while paying spousal maintenance, rather than dividing up ownership of the business.
The division of assets
As a married couple, the law dictates that upon divorce, all deemed matrimonial assets which can include a family business, are divided in an equitable manner and it may be appropriate to split the assets equally. All assets, including a stake in any business, will be considered when deciding on a settlement.
A business owned by either spouse in a marriage can be classed as a marital asset regardless of their personal level of involvement. Whether your partner works a separate job or runs their own business, the business can be subject to division during divorce proceedings.
However, it’s improbable for a former spouse with no experience in managing the company to receive a portion of its ownership. Granting ownership to an unskilled party could result in significant harm to the business, especially if the divorced couple cannot work together.
During negotiations with solicitors, both parties will generally be advised to consider what the Court’s likely decision would be in such cases, bearing in mind that it is always preferential to keep the business under the management of its owner if there are other assets that can be awarded to the non-owner spouse.
This is often the desired outcome for both parties to avoid dividing the business or forcing involvement where not wanted. Often, by enlisting solicitors who specialise in such matters, couples can come to an amicable agreement without ever stepping foot in a court.
If the couple’s relationship is amicable and they can cooperatively run the business, the court may consider a shared ownership arrangement. Otherwise, the court will seek an equitable solution for both parties’ assets while allowing for a clean break from one another.
Valuing a Business
As a divorcing couple (spouse or civil partner), it is essential to consider any shared business interests when settling finances. If either party owns a business entirely or has a significant shareholding in it, it will need to be valued.
If you share the business, either party can arrange for a valuation. However, if only one of you owns it, they will need to request an evaluation, whether they run it on their own or with others.
The valuation process can be complex, especially for privately owned businesses. The value will depend on factors such as assets, earnings, and the structure of the business, whether it’s a limited company, sole proprietorship, or partnership.
It can be a costly and time-consuming process, with prices often reaching thousands of pounds. As such, it is essential to seek legal advice before arranging for an expert to carry out a valuation.
However, small businesses with minimal assets and no resale value are not required to undergo valuation. Since there is no business asset to divide, the owner can make maintenance payments from personal income, while marital assets such as savings, pensions, or the house can be divided for a fair settlement.
For accurate and unbiased business valuations during a divorce, it is highly advised to hire a specialist independent accountant instead of relying on a business’ existing accountant. Using an advisor with a potential conflict of interest may lead to legal challenges from the spouse’s solicitor.
Keep in mind that court-appointed accountants’ costs can reach tens of thousands, whilst property and other assets will require additional independent experts, driving the costs further up.
Valuing a business involves taking a comprehensive look at various factors that contribute to its overall value. These factors include, but are not limited to: income generation, standard of living provided by the business (independent of formal income or dividends), ownership of property or assets (with consideration of loans and equity), company pension structure, and evaluation of other shareholders with varying interests. An informed assessment of a business requires a deep dive into these crucial areas.
Protecting a Family Business from Divorce
In cases of divorce, it is rare for a court to order the sale of business assets. Typically, the goal will be to leave the business intact. Even if assets cannot be liquidated immediately for a fair settlement, spousal maintenance, if appropriate, can be considered instead.
Unfortunately, once you are headed towards divorce, it can be difficult to separate your business from family assets, . It is possible to propose a post-nuptial agreement, however this would have to be agreed. It is better to opt for a pre-nuptial agreement before marriage, or a post-nuptial agreement before separation which can dictate asset division upon divorce, although it is not always binding. But it is always important to seek legal advice, especially if you have shareholder agreements in place.
Of course, many family businesses have been around for generations, but as a general rule, the history and growth of a family business are not major factors in determining the financial settlement of a divorce.
Shares in the business can be considered part of the family assets and can be divided fairly in the event of a divorce. However, in situations where dividing the business could harm the company or its shareholders, the court will not order its split or sale. Additionally, in cases where the marriage was short-lived or if there are no children involved, the court will be unlikely to split the business.
Disputing a valuation
Determining the worth of a shared business can be a major point of disagreement, particularly can if only one partner was involved in its running or operation.
In some cases, the business owner might intentionally undervalue the business in a misguided attempt to protect it from their former spouse. Where there is a suspicion that there has not been full disclosure an application for a court order can be made to obtain financial information directly from a business’ bank or accountant.
Whilst using independent experts to determine the true value of the business can be expensive, this may be the only option if an ex-partner is being uncooperative or providing a particularly low valuation.
Before seeking support, be mindful that the current state of the business may have changed since the last financial evaluation. Even if the business was thriving in the past, recent changes may have impacted its value. Additionally, business owners can often be overly optimistic about their own business, so the reported profitability may not be entirely accurate.
If there is any doubt as to whether a former partner has been honest in their valuation of a family business, then there are several remedies that can be sought.
- Through a lawyer, you can request a review of the company’s financial records to determine whether additional investigation is warranted.
- You can co-operatively decide to have the business valued by a person known as a “single joint expert.” This person is impartial and there to offer an independent assessment.
- You might each consult your own specialist, although bear in mind if the dispute proceeds to court, the court will want a “single joint expert” report.
- You could enter mediation to resolve the dispute.
If you think your ex-partner has undervalued the business then you have several options:
You can ask your solicitor (if you’re using one) to look at the company’s books to see if it’s worth investigating further.
You and your ex-partner might agree to use what’s called a ‘single joint expert’ to value the business. This person is independent and there to provide an impartial valuation. It’s important to get legal advice before you do this.
You might each use your own expert. This is likely to be the most expensive and complicated option and is not used very often.
You and your ex-partner might investigate mediation or other dispute resolution methods, instead of experts, to help resolve disputes over dividing business interests.
Can I sell my business before divorce?
In the UK, it is legal to sell a business before divorcing, but there are several important factors to consider before proceeding with such a decision. While you have the right to sell your business, this action can have significant implications during the divorce process, especially regarding the division of assets.
If the business is classified as a marital asset—meaning it was acquired or substantially grown during the marriage—its sale could still impact the divorce settlement. Even if you sell the business before the divorce, the court may treat the sale proceeds as part of the marital assets. These proceeds would then be considered when dividing assets between you and your spouse.
In any divorce, both parties are required to provide full financial disclosure. If you sell the business, you must disclose the sale, including the proceeds and any related financial details. Failing to disclose this information or attempting to hide assets can lead to legal penalties and negatively affect the divorce outcome.
Additionally, if your spouse has contributed to the business or has an ownership interest, either directly or indirectly, they may have a claim on the business or its sale proceeds under the Matrimonial Causes Act 1973, which aims for a fair distribution based on various factors. Therefore, their consent or involvement might be necessary, especially if the business is seen as jointly owned.
It’s also essential to consider the timing of the sale and the potential tax implications, such as capital gains tax, which could influence your financial situation during the divorce.
So, while selling a family business before divorcing is legal, consulting with the legal and financial experts will be crucial to ensure the sale remains compliant with UK law.
Should you wish to discuss such matters in greater detail, or would benefit from our experience in tackling such sensitive and emotive issues, please do not hesitate to contact us to arrange a confidential, impartial consultation.
