Divorce is difficult time for most people. One thing that those divorcing worry about is the financial aspects of their divorce. Business owners worry what impact their divorce will have on their business. Will their business still be viable after the divorce? Will they have to sell their business? Here, McAlister Family Law Partner, Fiona Wood looks at the division of business assets in divorce.

When a couple divorce, before they can be advised what a fair financial settlement is, they both need to provide full details of their assets, liabilities and income. This is known as providing financial disclosure. If you have an interest in a business this needs to be disclosed as part of this process, whether you have shares in a private limited company or a publicly floated company, are a partner in a partnership or are a sole trader.  The value of a spouse’s business interests will often be valued within divorce proceedings.

Businesses come in all shapes and sizes. Some are small businesses that have very limited assets and are just an individual working on a self-employed basis, for example an IT consultant who works through a limited company. It is unlikely that this type of business will have a value, as the business is just a vehicle through which that person earns an income. If you take that person away the business has no value, save for any money held in its bank accounts.

Other types of businesses are likely to have a value and will need to be valued, unless a value can be agreed by the spouses. If a business valuation is needed when a couple divorce it is usual for the couple to jointly instruct an accountant, who is an expert in business valuations, to prepare a valuation report. Valuing a business is an art, not a science, so different accountants will attribute different values to the same business. Some accountants are more conservative than others with their valuations. It is therefore important that you take advice upon the right accountant to instruct before going down the valuation route.

Most businesses are valued in one of two ways – a net asset basis or an earnings basis.

Net Asset Basis

Businesses that have significant assets, such as properties, are usually valued on a net asset basis. This is the value of all the assets owned by the business less all of the debts. Where the business owns assets such properties, it may be necessary to get up to date valuations of these before the accountant prepares their report.

Earnings Basis

This method is usually appropriate where a business is trading and generating a profit from that trade. Typically, this method requires the assessment of the likely level of Future Maintainable Earnings and the application of an appropriate multiplier. To do this recent trading performance is usually considered.

Usually, the jointly instructed accountant will undertake both calculations and use the highest figure. Therefore, a trading company could be valued on a net assets basis if its assets have a very high value or alternatively if the recent trading performance has been poor, and therefore the Future Maintainable Earnings are low.

Once the accountant has valued the business, they must also consider the tax that would be payable by the business owner if their interest in the business were sold. This is because the divorce court uses the net value of the spouse’s business interests, when considering what a fair financial settlement is.

If the spouse does not own the whole business the accountant must consider whether the spouse’s interest should be valued on a pro-rata basis or whether a further discount should be applied. Often a discount is applied if the spouse has a minority shareholding in a business.

It is all very well valuing a business or a spouse’s interest in that business, but the business may not be able to pay out significant sums of money to assist fund a divorce settlement, even if the spouse’s interest has a significant value. The accountant therefore also needs to look at liquidity when they prepare their report. This is the amount of money that can be taken out of the company by the spouse, without impacting its ability to function as a business. The tax consequences of taking this money out of the business must also be considered.

If a business has limited or no liquidity, this is a factor that will have to be taken into account when considering what a fair settlement will be. If it is considered appropriate for the business owning spouse to pay money to their spouse as part of the divorce settlement, the payment of this may take place over a few years if insufficient money can be raised through the business or elsewhere to pay it upfront in one payment. A judge may also say that if the business is sold in the future that the non-share owning spouse should receive a proportion of the net proceedings of sale of their spouses’ shares at that point, if there is insufficient money for the spouse without shares to receive their fair share of all the matrimonial assets, including the value of their spouse’s business interests.

Will a judge order a sale of a business as part of a divorce settlement? If the only owners of a business are one or both spouses, a judge could, in theory, order a sale of the business. However, this would be extremely unusually, as the business is usually a significant source of income for the couple and unless they are both saying that they want the business to be sold this is very unlikely to be ordered as part of a divorce settlement. Usually, one spouse is provided with capital in lieu of their spouse retaining a business or they receive part of the net proceeds of sale of that business if it is sold in the future.

If you are divorcing and have a business, it is important that you obtain advice from an experienced family solicitor who regularly deals with divorces where there are business assets.

If you or someone you know is affected by the issues raised in this blog post, we can provide you with expert legal advice. For more information, please get in touch with our specialist team at hello@mcalisterfamilylaw.co.uk