Our experienced divorce solicitor, family mediator and collaborative lawyer Wendy Ryle looks at the issues around business and divorce.
Recent national statistics show that about 236,000 people in England and Wales start divorce proceedings each year.
Many more separate. For couples with business interests, the key question is how the business will be dealt with.
As a lawyer who specialises in dealing with financial and other issues arising from relationship breakdown, l thought l would provide some guidance.
Financial Basics on Divorce
The first duty of the court dealing with finances on a divorce is to have regard for the welfare of any minor children. There are also considerations such as the ages of the parties, length of the relationship, contributions, health problems and, very importantly, the financial needs and resources of the couple. A business interest will be a financial resource.
Each case will depend on its particular circumstances. The court must aim to achieve a fair outcome and do its best to at least meet the essential day-to-day needs of the parties and any children.
What approach is taken to business interests?
Business interests can take different forms, including shares or a debenture in a limited company, a share in a partnership or a business operated by a sole proprietor. Usually, only the interest owned by the party divorcing or separating is taken into account, but this will often involve an overview and valuation of the whole business.
In the case of a long marriage, the starting point for the division of the assets is an equal one. A long marriage is now considered to be one which, including any pre-marriage cohabitation, has lasted for ten years or more. The assets, apart from the business interest, may be the equity in the family home and investment properties, savings, stocks and shares and valuables such as jewellery, paintings and cars.
Valuing the business
The extent to which a business and its value will be investigated may depend on the value of the other assets and the nature of the business. A situation which l frequently encounter is the service company which is run for professionals, such as computer contractors and some medical consultants, for tax reasons. Little or no value may attach, save for any surplus funds, and these may be taken to be the value of the business.
There are numerous small trading companies run by builders, other trades people, garage owners and the like, where the assets of the company are negligible and attention focuses on the income stream.
Where a business has assets and is of some substance, investigations will be made. These will usually start with a study of the last two years’ accounts. If the business is not too large and there is sufficient trust between the parties, the accountant for the business may prepare a ‘desktop’ valuation. In other cases, a report will be commissioned from an independent forensic accountant, jointly instructed by the couple’s solicitors. An industry has developed in the field of forensic accountancy for divorce cases and l often advise on which professional may be suitable for a particular business.
The forensic accountant will be provided with accounts for at least the last two years and the up-to-date financial records of the business. Access will also be given to the managers of the business and the accountant. The forensic accountant’s fees are usually shared and can be significant: £6,000 plus vat or more.
If you have any questions regarding business and divorce contact Burt Brill & Cardens on 01273 604123.
What will happen to the business interest?
Once the nature and value of the interest has been assessed, there will be options available for how it will be treated in the divorce. If the business has little capital value but produces a reasonable income, the non-owning spouse may receive enhanced maintenance or be awarded a larger share of other assets by way of compensation.
In a majority of cases, the business interest will be retained by the spouse involved in the business and the other spouse may receive a larger share of the other assets or a structured settlement providing for capital to be paid by installments. There are instances where the non-owning spouse is granted shares or a debenture in the business to provide future income and capital. These arrangements are best resolved by agreement rather than by the court’s decision as the court’s powers are limited to orders for the payment of money or the transfer of assets.
What if the marriage is short?
If the relationship breaks down in its early years and a business was brought to the marriage by one party, it will tend to be left
out of the assessment of the marital assets available for division, especially if there are no children involved.
And what if one party’s business talents have been exceptional?
In a very few cases, the court has had regard to ‘stellar contributions.’ These resulted in asset divisions weighted in favour of the wealth creator as happened in the divorces of Sir
Paul McCartney, Sir Terence Conran and a Mr Cowan – who invented the black bin liner with a drawstring! It has to be said that the other spouses in these cases were still very well provided for financially.
What about the taxman?
There will usually be CGT considerations, and the timing of a separation can be crucial. Potential tax liabilities are usually taken into account in the valuation process. The tax implications of any proposed settlement must always be considered.
What if the couple are not married?
The comments here only apply to parties to a marriage, civil partnership or same-sex marriage. If an unmarried couple separate, the party who does not own the business interest will have no automatic right to claim against the business interest. The Law Commission has recommended that cohabitants should have certain rights after two years’ cohabitation, but it remains to be seen if this will become law.
How can I protect my business from a claim arising from divorce or separation?
It is possible for a couple who are contemplating marriage to enter into a pre- nuptial agreement. Married couples going through a difficult period may find a post- nuptial agreement helpful, stating the financial terms to apply if they divorce or separate. In this way, they can go forward without the worry of excessive claims being made if there is a divorce.
Nuptial agreements must comply with certain requirements and are not automatically legally binding. It is thought likely that the law will be changed on this in the near future.
Want to know more?
I have advised and represented business owners in connection with divorce and separation on many occasions. My clients are many and varied, from the sole owners of small businesses to the majority shareholder in a national restaurant chain, amongst others. I am always happy to meet for an initial consultation before commitment.
Email me at Wendy at email@example.com or arrange an appointment on 01273 604123.
This article was originally published in Platinum Business Magazine.