Divorce is never an easy process, but it can be particularly damaging to a business. Far too many business owners find themselves facing divorce without considering the impact this may have on the business itself. So, whether this is something you’re experiencing yourself, or your clients are facing divorce, it’s essential to understand what happens when a business owner’s personal relationship ends.
During a divorce, a business is often put under the microscope. It’s possible to have forensic accountants digging into every detail to find out how much it’s worth, how profitable it is now, and how profitable the business is likely to be in future.
The court will look at how profitable the business is and consider whether the business assets could be used to meet the divorcing couple’s financial claims if required.
This would be a big problem if the business owner planned to use those assets to develop the business in the future.
Protecting a Business
Business owners facing divorce should get legal advice before taking any action to protect their assets. If it looks like a business owner is hiding, deliberately depleting, or moving assets, or changing shareholdings to avoid future claims in a divorce, their case will be damaged. The court takes an extremely dim view of such behaviour. It has the power to disregard any actions that are specifically designed to avoid future claims.
If a divorce is imminent, it may be too late to protect your business; but if a business owner is merely planning for any eventuality, there are a few principles to keep in mind.
Although they’re not legally binding, a pre-nuptial or post-nuptial agreement can help limit claims against your business. If the business owner has planned ahead at the time of the marriage or afterwards with a post-nuptial agreement, they can ask their spouse to agree not to make damaging claims against the business if their relationship goes wrong in the future.
Keep business and private assets separate. This is good business advice anyway, but keeping the business entirely separate from the owner’s personal assets will help in the event of a divorce. The family home is often used as security for business borrowing, but this can cause problems when relationships break down.
Business owners often involve their spouses in the business, and this can be a good idea—particularly for tax purposes. However, if their spouse is involved, they have a stronger claim on the business assets because they’ll have contributed to its success.
If one person owns 100% of a business, the court will treat the company like any other asset. Unless there are good reasons not to, the business owners may have to divide or share the business between them. If outsiders are involved as shareholders or business partners, the court is less likely to take action that could damage the other shareholders’ incomes.
What is the Business Worth?
Business owners may have spent years building up the business, so the idea of losing part of it or having it divided in a divorce can be heart-breaking.
Not all businesses have to be valued, though, and some are simply income streams. If there’s nothing to sell, only the income stream matters and that doesn’t need to be valued because it can be shared via a maintenance order.
If the business isn’t just an income stream, it should be valued, or the business owner should agree on a value with their spouse. Valuing a business is a specialised job. Many factors are considered including projected income, goodwill, costs of sale, capital gains tax, depreciation costs, and the nature of the business itself.
It’s possible the business would be worth very little without the owner’s skills and expertise, so it’s crucial to get a valuation as soon as possible.
During the valuation process, the accountant will consider the following:
- Tangible assets: including land and property, vehicles, machinery and equipment, inventory, furniture, and securities (like stocks, bonds, and cash). There are two types of tangible assets: current assets, which can be sold easily to raise cash, and fixed assets, which are needed to run the business continually.
- Intangible assets: these are usually non-physical assets—often intellectual—and as such, it isn’t very easy to value them. They may include patents, trademarks, franchises, goodwill, copyrights, brands, blueprints, internet domain names, and many other assets.
- Earnings: the profit the business is expected to make in the future.
- Structure: whether the company is a limited company, sole trader, or partnership.
If the business owner or the spouse believes the valuation is not accurate, they can apply to the court for permission to hire separate accountants to conduct their own valuation.
“Needs” Take Priority
If the court decides the existing matrimonial assets do not meet all the needs of the business owner, spouse, and any children, the court has the power to use the business as a financial resource if it decides that the business owner’s family needs a share in order to be secure.
For example, if the business owner and spouse own a family home and there’s not enough equity in the property for both parties to comfortably buy a new home, the court will use the business as a financial resource.
In an ideal world, the court doesn’t want to leave one person with cash and the other with assets tied into a business, but that’s often what happens. If the business is divided in any way, though, the court should be flexible, allowing the business owner to share income or decide to split the shares.
The good news for business owners is that the court leaves the business with the business owner wherever possible, looking to compensate the other spouse with a larger share of other assets or with a maintenance order. This is often what couples want anyway.
- The business owner will need to prepare full financial disclosure of all their personal and business assets.
- Care should be taken if the business owner wants to take steps to protect the business. Any actions that are obviously designed to limit the spouse’s claims will be disregarded by the court and will damage the business owners’ own case.
- The business owner should get in touch with an experienced family solicitor as soon as they suspect their relationship may be in trouble—and immediately if a divorce is imminent. The more the business owner knows and understands, the better prepared they’ll be, and the better the outcome for them.
For further information or any other advice please call us on 0800 999 4437. You can also get in touch via email firstname.lastname@example.org