Divorce can be a complex and emotionally taxing process, particularly for business owners who are concerned how a divorce might impact the profitability and future of their business. Protecting the business will often be the owner’s top priority and that might even dissuade them from starting divorce proceedings in the first place.
This article will explore the essential considerations surrounding business assets in divorce. Whilst this can be a tricky topic, it is not an impossible feat to overcome and business owners should feel reassured that with good early advice from a specialist family solicitor, they will be able to get through the process and continue to make their business a success.
The Valuation Exercise
In many marriages, spouses may own a business (either separately or together) that has substantial value. That value will need to be determined by a suitable expert for effective negotiations to take place and that valuation exercise can often be one of the most challenging aspects of the proceedings, but it is important that it is done correctly.
The valuation process typically involves either:
- A valuation of the physical assets of the business (in the event the value of the business is referable to the value of the underlying assets); or
- A valuation of the maintainable earnings of the business (in the event the value of the business is referable to the earnings it generates). This will involve an in-depth analysis of the sustainable earnings of the business (by looking back over the last several years’ performance) and considering how many years’ worth of that income a buyer would pay to take over the business.
The court always works with net values on divorce so it is also important to understand, theoretically, what tax liability would arise on a sale of the business and/or the relevant spouse’s share of the business. That analysis, along with confirmation of the notional costs that would be incurred to sell the business, considerably reduce the value of business assets for divorce purposes.
Matrimonial vs Non-Matrimonial Property
Once the value is confirmed, it will be a case of determining whether the value should be shared.
This will depend on whether the business is classed as a matrimonial on non-matrimonial asset:
- If the business was started during the marriage and made a success by both spouses (or by one spouse with the support of the other spouse), it is likely to be classed as matrimonial in nature and shareable, although there is sometimes to scope to argue that the whole value should not be shared if in order to realise that value, the business owner would need to put in a significant amount of work and effort post-separation (more information around this topic can be found here.
- If the business was started by one spouse prior to the marriage or was derived from an outside source (for example, by inheritance or gift), that would suggest that it is, at least in part, a non-matrimonial asset.
The difference is key. If an asset is matrimonial in nature, it is shareable. If it is non-matrimonial in nature, as a starting point it is not shareable unless sharing its value is necessary to meet needs.
The distinction is not always black and white. Assets can become matrimonial over time irrespective of origin if ‘mingled’ with matrimonial property, particularly where the business has grown in value during the marriage with the support of the other spouse. However, recent case law suggests that the origin of the assets remains significant when determining the extent to which they should be shared with the other spouse, irrespective of whether the asset has been ‘mingled’ with matrimonial property over time, which is discussed in more detail here.
Settlement options – other factors to consider
When considering options for settlement, it will be important to also consider the following:
- Liquidity: to understand whether the business owner spouse could afford to extract large sums of money from the business (by declaring a dividend or otherwise). If the business is highly leveraged and/or has minimal cash reserves, this may not be possible.
- Taxation issues: to understand the tax implications of each settlement option (for example, a share buy-back by a company).
Conclusion – business assets and divorce
By understanding these critical aspects and with expert advice and guidance, business owners can work towards achieving a fair resolution of their finances on divorce whilst safeguarding the future of their business.