The assets of any business you own will be considered as part of a divorce or dissolution settlement. Unlike land, property, money in the bank or investments, it’s not easy to value business interests or convert them into cash.
Solicitors sometimes view a business interest simply as an asset to be valued by an accountant. This is usually then added to the balance sheet along with the other assets owned by the parties. However, it can often be useful to look at a business asset as a resource: how much money can be drawn from that business to fund a financial settlement on divorce, and how much income could the business produce in the future? The latter question often needs to be addressed when quantifying spousal maintenance.
It is particularly important to acknowledge that the value of a business interest is inherently different to the value of a liquid asset. The courts have drawn a distinction between property or savings, which could be viewed as ‘copper-bottomed’ assets, and shares in a business, which are ‘risk-laden’ assets. In addition, the courts have shown an increasing reluctance to base an entire award upon an accountant’s valuation of a business interest, and instead simply apply the yardstick of equality.
Common Questions & Answers
Is a business a matrimonial asset?
An argument may be made as to whether a business interest should be viewed as a matrimonial asset. In such circumstances, business assets generated solely by the efforts of one party may be classified as non-matrimonial assets. They will not be ring-fenced and excluded from consideration, but will be treated as the creator’s unmatched contribution so as to justify a departure from the application of the yardstick of equality.
The point should be made that adding the value of the business to the matrimonial balance sheet, in cases where the claimant may also be entitled to periodical payments (spousal maintenance) funded by the profits of that business, risks giving the claimant a double benefit, since the capital value of the business often reflects future incomes by way of the ‘profit earning ratio’ basis of a business valuation.
Will the business need to be sold?
While courts will try to avoid selling a business, they will require a sale if there is no other way to achieve a fair outcome. It is, however, exceedingly rare that the court would ever order the sale of a business. Even where a court does require a sale, it will usually try to give the party who owns the business interest the maximum opportunity to buy out the other party’s interest by staging payments over a period of time and requiring payment to the other party of periodical payments for maintenance in the meantime. A court will also be concerned to give the party with the business interest time to sell the business so as to avoid a fire sale where the full value of the business may not be realised and the basis of an order therefore undermined.
How is the business valued?
In some cases expert evidence will be required from an accountant in respect of the business interests. Usually one accountant will be instructed by both parties as a single joint expert in accordance with the Family Procedure Rules 2010 (FPR 2010). It is only in limited cases where it may be appropriate for each party to instruct their own expert to provide evidence in respect of the business. Such circumstances may include the situation where one party is deliberately seeking to conceal assets within the business or has attempted to dissipate business assets. The issue of expert evidence will be considered by the court at the first appointment.
In some circumstances the report from an expert accountant may only need to be limited; for example, after a short marriage or where the business is a modest enterprise, the court may direct that an accountant provide a simple ‘desktop’ valuation of the business interests. The court may also seek to cap the accountant’s fees to be incurred.
Where a single joint expert is instructed, they will usually be specifically asked to advise on liquidity (or lack of it), the possibilities available to extract money from the business and the tax consequences of the same. If a significant proportion of the value of all the parties’ assets is represented by an interest in a business, illiquidity may mean that it is not possible to achieve a financial settlement that also facilitates a clean break. In such circumstances an alternative to requiring a sale of the business might be to transfer all non-business assets to the other party or leaving the shareholding shared.
Does a divorce involving a business require a specialist divorce solicitor?
If you are a business owner going through divorce proceedings its important to instruct a divorce solicitor who has knowledge in this area. This will ensure that the interests of your business and your future income are well protected. If you are the spouse of a business owner the same rule applies – instruct a specialist divorce solicitor – to ensure your interests are represented and you get the best possible financial settlement.
Our family law team has this expertise. They are also supported by the Business Services team can provide advice on any aspect of Corporate and Business law.
If there is a business involved in a divorce we would recommend that you choose the detailed, fixed fee 1 hour divorce consultation as your first appointment option so we have plenty of opportunity to discuss the implications of the business on your divorce settlement.