Divorce and the Family Business
Business interests in divorce proceedings often lead to difficulties within the resolution of financial matters and the law as to how these business interests are dealt with is complex. It is therefore important to take good legal advice.
The law states that on separation, all the circumstances of the case must be taken into account. By definition therefore, this includes any business interests. The Court has a wide discretion to do what it considers to be fair. The traditional starting point for dividing assets is equality but fairness and needs may dictate otherwise. Treating a business asset as a cash asset in the same way as property or savings is a common mistake. Another common mistake is taking into account the full value of any business interests and then making spousal maintenance payments on top (double counting)
Some businesses are small income producing businesses only and therefore there is little merit in having the business valued by an independent accountant as there is no real capital value to the business. However, in large or more complex cases, a valuation can be helpful to guide the legal advisers and if necessary the court, as to future income generation, whether there is surplus cash, what the viability of a future sale is etc. This will be carried out by a forensic accountant. There are a number different valuation methods depending on the type of business but valuations have also been described as a snapshot of the position only, so are best used for guidance purposes.
The Court’s preference is to divide the “copper bottomed” assets such as houses and savings, in one way (usually so as to meet needs) and then divide the more risk laden assets, such as a business, separately. The Court is able to order the business to be sold although the normal outcome is generally to leave the business intact as it is usually the main source of income for the family. It can also order shares in the company to be transferred from one person to the other, subject to any restrictions in the shareholders agreement. If there is a large degree of cooperation, both spouses might remain in the business. A new shareholders or partnership agreement is likely to be required. The non business earning spouse can possibly be compensated by receiving a greater share of the other assets such as the home, investments and pensions. She/he may also receive maintenance whilst waiting for their share in the business to come to fruition. Alternatively, it is sometimes possible for a business to raise money because it has surplus capital or it can borrow funds. This way a clean break can be achieved which is usually what most separating couples would like to achieve.
It becomes more complicated if the business is owned by several people. There are more restrictions on what can be done and the other business owners need to agree to help.
If a business person is looking to get married, it is certainly worth asking his/her fiancé to sign up to a pre-nuptial agreement. This can protect the business in the event of a divorce, provided the overall agreement is fair and meets the other person’s needs.
Divorce involving business assets can be expensive and time consuming. It is much better to try and reach a fair outcome and use arbitration as opposed to Court in the absence of an agreement. Specialist advice on this complex area is however highly recommended.