Business interests on divorce
Divorce or the dissolution of a civil partnership can be a messy event as two people try to untangle their personal and financial lives from each other. It can become even more complex if the two parties own and run a business together.
A common misconception is that that the Family Courts will disregard business interests when considering a financial settlement. However, just like property, shares, savings and pensions, business assets are included in the matrimonial pot and subject to being divided on divorce or the dissolution of a civil partnership, irrespective of which party founded or runs the business.
The Family Court does prefer not to interfere with the smooth running of a business or change its ownership. However the business will be considered during proceedings both in terms of its overall value and the income that it produces.
While each case is different, it is necessary to establish some key facts:
- How the business is owned and by whom? – is it a sole trader, a partnership or a limited company with directors and shareholders.
- The nature of the business
- What it is worth and what is the most appropriate method of calculating that sum? – there are different ways of valuing a business depending on what type of business structure it has.
- What income has it historically provided and what can it provide in the future?
- Whether there are any surplus funds in the business which could be extracted to meet either party’s claim and if so, what is the most tax efficient way of doing so?
Business owners must provide an estimate of the business value, supported by company accounts. There is no ‘one size fits all’ approach to company valuation. A range of factors are used to calculate business value including the total business assets, the annual turnover and profits for previous years, the expected profits and the business debts.
If the parties disagree over the valuation given to the business, the Court will often direct that an independent expert, such as a qualified accountant often known as a Single Joint Expert (‘SJE’), be instructed jointly by both parties. The SJE will establish the overall business value and the income it can provide, assisting the Court to determine the extent to which it can be included in the financial settlement. The Court prefers to achieve full separation in terms of ownership of business interests. In cases where both parties own shares but only one party is actively running the business a possible outcome is a share transfer, whereby ownership of shares moves from one party to the other.
Tina Kingsbury is a solicitor in the family team at Barker Gotelee, solicitors in Suffolk.