Going through a divorce can be an extremely emotional and distressing process, with matters complicated further if either party – or indeed the couple – owns a business.
A divorce involving a business owner can also be disruptive for the business, so it is important to seek advice and guidance early.
Here, WHN Solicitors’ specialist family law solicitor, David Connor, answers some key questions for business owners going through a divorce.
Does the type of business organisation matter?
Given the different business organisation types, there may be other directors involved, with one party having the majority or minority shareholding, or it may be the business is run as a partnership or as a sole trader.
While a divorce may be disruptive to a business whose ownership extends outside the marriage, the type of business structure will not usually have an impact on how it is dealt with on divorce – rather its value or capacity to raise funds will be the determining factor.
Will my ex-partner have a legal right to shares in my business?
An immediate concern should be whether the business has to be sold or not. The court has power to order the sale of a business or a transfer of shares, and while rare, it’s not impossible for this to happen.
Although dependant on the circumstances of the case, it’s unusual for a small to medium family business to be ordered to be sold, particularly where it generates the income of both or one of the parties.
Whether or not part of settlement will include some shares of your business would depend on the circumstances of the case and if the spouse was already a business shareholder or partner. It would be unusual for the court to order the shares or an intertest in a business to a non-owning spouse.
The court has no power to order transfer of other stakeholders’ shares in the business, but it’s worth keeping in mind that if your former spouse gets a certain level of shareholding in the business following divorce, then they may be able to influence the direction of the business or block certain motions.
How will the shares be valued?
In some cases, the firm will be a vehicle for one or both parties to make an income, so there will be no capital value. In instances where there is a capital value, then this value will need to be evidenced.
This may be based on share capital, the value or assets versus liabilities or a multiple of the turnover.
Valuing a business can be complex. While accounting records can prove helpful, other factors such as profitability, turnover and the specialist nature of the business can also influence its value. An external forensic accountant may therefore be needed to forensically assess not only its value, but also its profitability and ability to raise cash, which could prove vital in the final settlement.
The judge will consider the nature of the business and if it needs a valuation by instructing an independent firm of accountants. This may be needed if one party feels the accounts were not truly reflecting the financial position of the company.
In some cases, if one party founded the business, they could argue that some element of value should be excluded from the overall asset pot for distribution because the business was started and successful prior to the marriage taking place. This could also be the case if there is a successful element to the business after separation.
Do I have to give my ex-partner the valuation?
Sharing the business valuation with your former spouse is a must, as disclosure requires each party to be open and honest about their views on value. The court will appoint an expert for a joint valuation and both parties will see the report.
Dealing with businesses during divorce proceedings can be incredibly complex, so it’s vital that anyone who is going through or contemplating divorce accesses specialist legal advice at the earliest opportunity.
David Connor is a director based at WHN’s Rawtenstall office. He leads a team of specialist family lawyers, helping individuals on all areas of family law including complex financial cases including pre-nuptial agreements, financial settlements in divorce and separation, and especially high-value cases and those involving business interests and protective orders and agreements where assets may be at risk of being removed or dissipated.
If you need help on a divorce and finances matter, our specialist solicitors are here to help. Please contact David on 01706 225621 or by email david.connor@whnsolicitors.co.uk
