Getting divorced is, for almost everyone involved, a stressful experience. Assets get divided up, arguments often abound and there can be the welfare of children to think about. Now add to that, the idea that your livelihood is threatened too. This is the situation business owners can face when they consider divorce.
Will their ex-partner get half the business? Will the business have to be sold? What if you both work in the business? Will we all lose our livelihoods? What will be left as an inheritance for my children?
These are the kind of stressful questions we are here to answer - and sort out for you.
Sally Powell, partner in the Tees Family law team, considers the challenges and sets out what can be done. As a business owner planning to divorce, you have options. It’s vital that you get specialist legal advice to make sure you choose the right route to go down.
How are assets divided in divorce?
In a divorce, the first challenge is to establish what the needs of each party are and how they can be met. Consideration is also given to a principle of sharing and dividing assets in a way which is objectively fair – but that does not necessarily mean equal.
The courts have a very wide discretion to reallocate assets within a marriage. If one of you owns a business, the assets (or liabilities) of that business will be taken into account, in terms of assessing the ‘pot’ that is to be distributed between you.
In general, the court will try not to order the sale of a business, if one of the parties is against this. Instead the outcome is more likely to be that the business is retained by offsetting against other resources, or there is a series of ongoing payments, funded by the business profits. This arrangement tends to work well when one person is only interested in the business for the money it generates, not for the business itself. This has the benefit of keeping the business going for the future.
Divorce and business valuation
Valuing the business is often the first step which gives vital clarity. A valuation can also report on business debts and liabilities, as well as cash flow and liquidity. Take care to consult a legal team that has access to business legal expertise, as well as family law expertise.
It will of course help if you have kept accurate financial records and have avoided mixing business and family funds together, to understand the valuation of the business and how it operates. There are occasions of course where business and family funds are mixed – which potentially makes the task harder, but not impossible.
It’s important you don’t attempt to move money out of the business if you think you might be headed for divorce. The courts require full financial disclosure as they strive towards a fair resolution and if you’re caught having done this, it will not do you any good in the eyes of the court.
The valuation process should identify:
- the business structure – a partnership, limited liability partnership or company or are you a sole trader?
- whether it’s possible to take funds out of the business without damaging its future prospects
- information about the shareholdings arrangements: who has shares, to what value and what are the relative percentage shares that people own and are they family members?
- list the tax liabilities – both as individuals and the business tax that is owed
- Is there a parent company, with additional companies also with value (or debts and liabilities) to consider?
The history of the business
It’s important to gather evidence to establish how and when the business began and who has contributed what to its development. This is because the respective roles of both parties in the development of the business over time, will impact the negotiations when it comes to deciding who gets what.
When did it start trading? Has it been in the wider family for many years? Or was it built up by one or both of you during the marriage, or started by one of you before you married?
The people running the business
You need to establish facts around the running of the business. This is important also if you don’t plan to sell it, but it will provide income to the person who doesn’t keep the business. You need to clarify:
- who is pivotal to the running of the business? Who are the other key players?
- are any of them family members?
- is your partner employed by the business? This can be tempting to do for tax reasons, but it could allow them to claim a bigger share, claiming they have contributed more than they may have actually done.
- are there adult children who are involved in the business?
- does anyone in the family live on the business’ premises?
- is the business run from the family home?
The vision for the business
If there is significant value in the business and the plan is not to sell it, the two people involved in the divorce will need to discuss whether there are sufficient other assets in the marriage (such as property or investments) to give one person an equivalent value to half the business.
It might be intended that the business is sold at some point in the future, for example at the point of retirement, in which case a balance in a settlement could be finalised at a future date.
If you put in place clear plans for your children to inherit the business and be involved in its running, this can help sway the court that selling it to release funds, is not in the adult children’s interests.
When the business is a farming business, things can be even more intertwined because the family home is often standing on the land and farming is an all- encompassing way of life. At Tees, our heritage and culture has been rooted in the local farming community in the East of England for well over one hundred years. Find out how we can help you protect your farming business from divorce.
Is going to court inevitable?
No. It’s not the only option and you should probably avoid it if possible due to its expense.
Protect your business in advance
By taking professional advice and taking time to plan, you can put in place measures to create a structured settlement to protect the business. If you are thinking ahead you should consider a pre-nuptial agreement (or post-nuptial agreement if already married) as this is another effective legal device for protecting assets for the long-term.