Will Divorce Affect Your Business?
Divorce or civil partnership dissolution will certainly have an impact on your business. Historically, it has always been assumed the family business would be protected during a divorce, however, recent case law has shown that this may not always be the case. Today, the family business is considered to be an asset alongside the matrimonial / partnership home, investments and pensions. Every divorce is different and the court now considers all the family circumstances when arriving at a settlement.
The following page contains details on:
- Points to consider about your business.
- Litigate or collaborate?
- What can you do to protect your business?
- Valuing your business.
- The valuation process.
- How will the valuation effect the settlement?
As an asset, your business is going to be under scrutiny and you will be required to make a full and frank financial disclosure. In addition to this, it is always helpful to sit down with your solicitor and flesh out this information. All businesses are unique and a full knowledge of the nature of your business and how it operates will assist your solicitor with your case.
Some points you may wish to consider:
- What are your plans for the business - do you want to run it as a sole trader?
- Were you hoping to leave it to your children?
- Who set up the business?
- A realistic idea of how much contribution your spouse / civil partner has made historically and at present.
- Who else is involved in the business? For example, are there business partners outside the family whose livelihoods would be affected?
- What is the position with regard to the sale of shares?
- How is the business weighted financially?
- Is it capital heavy and income light like a farming business or capital light and asset heavy like a consultancy?
- What are the strengths and weaknesses of your business in today's market?
- How do you see the business performing in the future?
- What are your plans for the business? Include what they were during your marriage / civil partnership and now you are getting divorced / separating.
Divorce / civil partnership dissolution, especially where business and children are involved is a highly specialised area of law and to ensure the best possible outcome, it is vital you take appropriate legal advice.
If you are both genuinely seeking a fair solution and feel you would be able to meet round a table with your respective solicitors, collaborative law may be the answer. Often more cost effective than traditional legal involvement, the process involves a series of four-way meetings with your solicitors where the issues surrounding your divorce / civil partnership dissolution are discussed with a view to reaching resolution. Once resolution is reached, it can be made into a formal agreement or court order in the same way. Only those trained in collaborative law can practice, so both of you will need to select a collaborative solicitor.
In awarding a settlement, the courts will therefore consider the family business together with any other family assets and depending on the individual circumstances this could mean the business having to be sold.
There are measures you can take in order to reduce the impact on your business. It does, of course, depend on whether the business was started before or during your marriage / civil partnership, who started the business, whether your spouse / civil partner was active in the business and if he / she wants to remain so. These issues are best discussed with your solicitor in order that they can best build your case. Following this, these are some of the avenues you may be able to pursue.
Does the business have separable assets?
Are there any other assets that can be transferred to your spouse / civil partner without damaging the business? This can take the form of liquid assets such as bank balances, land or property in the case of farming or property development companies.
Do you have any non-business assets you can transfer?
It may be possible for the partner retaining the business to transfer non-business assets such as a larger share of the joint home, private savings or investments to the spouse / civil partner which can be offset against the spouses / civil partners interest in the business.
Paying instalments over a period of time
The partner retaining the business could opt to pay a lump sum to the spouse / civil partner over a set period of time. This may suit you if you can increase your income from the business over a limited period or generate sufficient borrowings.
Paying your spouse a proportion of the net proceeds in the future
You may be able to agree to pay your spouse / civil partner a percentage of the net sale proceeds in the future. This does of course tie you together beyond your divorce / civil partnership dissolution which is not always desirable.
Can you continue to run the business together in some form?
If the business is generating a healthy income stream and you have children that need supporting, you may consider ways of both continuing the company. This approach is only suitable for some people and would benefit from the collaborative law approach.
Instead of a clean break, the other partner could opt to have ongoing maintenance payments, and if the business is sold in the future, opt to capitalise the maintenance at that point. Again, this has the disadvantage of leaving one partner reliant on the other which is not desirable in all cases.
As part of the process of reaching a divorce / civil partnership dissolution settlement, you will be required to make a full and frank disclosure of your financial circumstances.
Since the business can be considered an asset like any other, it is necessary to obtain a fair and meaningful estimate of its value.
It is in your interests to arrive at a fair and meaningful value for the business as soon as you can since costs can rise if it becomes lengthy and complex. You might consider the collaborative approach with face-to-face meeting, thereby reducing the amount of correspondence.
Valuing a business is more complicated and subjective than valuing a house. There are many factors to be considered such as projected income, goodwill and the nature of business you are involved in.
Costs of sale, Capital Gains Tax and depreciation costs will be taken into account. It might be that without your skill / expertise your business would be worth very little. It is, therefore, important that a valuation is undertaken at an early stage to ensure that costs do not escalate unnecessarily. We have links with accountants and forensic accountants to ensure an accurate report is produced to give you the best prospects for achieving a fair settlement.
The court usually prefers to appoint a single joint expert, a consultative accountant, who will act on behalf of both parties and assess the business with a view to making a valuation.
Sometimes, the valuation may seem too high or low based on the evidence you have submitted. Whilst it is important to remember that the valuation is not the only factor the court takes into consideration, if you think it is inaccurate you may apply to the court for permission to hire separate accountants to do a valuation. This situation is very rare and the courts will only agree if the costs are proportionate to the case.
In all cases, you should take legal, business and accountancy advice. There may be tax and capital gains tax implications in any decisions that you make.
When coming to a settlement, the court will consider the valuation together with all the other family assets. If there are children, the court will evaluate the best possible outcome for their long-term financial stability. Depending on the valuation of your business together with your individual circumstances, this may or may not mean selling the business.
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