What Happens to Your Business During a Divorce? - YouTube

Divorce is highly stressful and perhaps even more so for people who own a

business. This is a highly complex area of law and naturally business owners

will worry about their business. Family Law Partner Sarah Atkinson is here to

explain some of this to us. Let's start with the basics; what happens to a

business during a divorce? Well they're factored in in many different ways

depending on the nature of the business. Sole traders are very easy where the

person themselves is running a business under their own name because there's no

separate entity to value. Those with interests in partnerships or companies

are slightly more complex. In some circumstances purely the income that's

generated by the business is shared on divorce and it would be unfair on the

business owner to count a capital value as well as the income stream it

generates because if you sold the business you wouldn't then have the

income stream or vice-versa, so then you'd only share the income long-term

with the spouse on divorce. If you're not going to do that and you do need to be

able to share the actual value of the business interest then it will have to

be formally valued sometimes to determine what that is if it can't be

agreed, and then share the capital value between them. Okay let's look at that

more closely, if it's necessary how are businesses valued during a divorce? The

first step would be for the business owner to produce, as part of their

financial disclosure in the divorce process, a valuation from the company

accountants because they know the business better

than anyone and are best placed to do that. Sometimes there's a level of

distrust between the spouses that means the court will appoint an independent

expert accountant to confirm the value of the business so it depends how that

process pans out really. And what is involved if an independent valuation is

deemed necessary by the court? Well we would select a single joint expert

they're called in the process and the solicitors for both parties would work

together to prepare quite detailed instructions to the accountant,

gather all the necessary documents they need to review. Those questions

raised within the instructions would be to confirm the open market value of the

business interest i.e. what would a person on the street pay for that business

interest. Secondly we look at the tax consequences of selling that interest

because the court always works with net figures, so after tax what's the business

interest worth. Thirdly it will look at the liquidity of the business interest

i.e. could the company release money to share the value of the shareholding with

the spouse? And if so how quickly and in what method? And what are the top tax consequences?

And lastly they'll look at the sustainable income of the business owner

so as part of divorce, sharing future income is sometimes done and therefore

you need to know what sustainably can be earned from the business going forward.

And what would you do with that valuation? Well the court has various

powers available to it and its primary aim on divorce is to separate the couple

financially so they each have their own assets independent of the other and

there's no future financial ties between them. So the obvious way of doing it

would be for the court to order a lump sum payment by the person with the

greater share of the assets, including the business, to their spouse to share

the overall pot between them. If that's not viable, and it's not in every

circumstance, then it's open to the court to transfer ownership of shares in a

company - which can be quite scary for the business owner and maybe their

colleagues - that can be shared in that way so that the spouse becomes a

co-owner of the business for the future and shares the benefit or the failure

of the business as they would have if they'd stayed married. And in very rare

circumstances the court could even sell a business interest to release cash to

share between them. What would happen if a spouse already owned a business

before their relationship had happened? Well the way the case law has developed

the court now categorizes assets as non matrimonial property or matrimonial

property and that matrimonial element is what's effectively built up during their

marriage partnership and that's definitely the element that would be

shareable on divorce. So the court will try and identify how much the business

was worth when it was brought into the marriage.

It's very common these days with second marriages that people have built up

wealth in this way so that's why the case law is developing in that way. And

they will often do that just by taking the broad brush approach because no one can

look back to 1988 and determine the value of the company now and back then,

it's very difficult. So they'll just apportion it over the period of time the

business has been running normally. There are various complexities to that

analysis but the broad brush answer is they will ring-fence

an element of the pre acquired value of the business. So we've learnt from Sarah

that divorces that involve a business can be very complex and many people find

it necessary to seek out specialist legal advice.