What happens to your business when you separate?
Written by Anne Shears | Divorce | Family Law
If you or your spouse own a business whether in a sole name or in joint names, it is likely to form a key part of financial proceedings should the two of you separate.
The first stage in dealing with finances following separation is for there to be financial disclosure so that both parties and their legal representatives have full understanding and negotiations can then take place in relation to settlement.
The financial resources of both parties are considered and divided according to various factors including the needs of any children, both of your needs for accommodation and income and ultimately the resolution of the finances must be fair.
Business assets including shares in a limited company or assets owned as a sole trader or an interest in a partnership are considered within the financial proceedings and full disclosure in relation to their nature and the value of them is required.
In some cases it is possible to say that if an asset is owned before a marriage or civil partnership it is not to be considered a marital asset but that is difficult to establish if the business has generated income throughout the marriage or civil partnership.
It is essential to get a fair and correct valuation of the business to be sure that the outcome is fair.
There are some key things to take into consideration when valuing a business and they are:-
Value of the business assets themselves and at least two years of business
accounts are disclosed to assist with this;Analysis of comparative business models;
Cash flow
Depending on the nature and size of a business, a simple desk top valuation could be sufficient if the company is small and you each trust that you are being open within the disclosure. In some cases, it is necessary to jointly instruct an accountant to produce a formal valuation and in some cases also a forensic accountant to work through the business documentation.
There are various potential outcomes in resolving finances where there is a business asset and which of those is relevant will turn on the individual circumstances of a case, but they can include the following:
One party retaining the business and buying out their spouse.
The business can be sold, and net proceeds divided.
Business interests can be offset perhaps with one spouse retaining the family home or other assets and the other retaining the business. Maintenance payments may also be appropriate.
In some circumstances ex-spouses can continue in business together although, for obvious reasons, this is relatively unusual and both parties would need to be sure of their ability to work together into the future for that to be an appropriate outcome.
Prenuptial Agreements
It is possible to plan for what would happen with a business should a relationship fail before getting married and one effective way of doing that is to put in place a Prenuptial Agreement or a Postnuptial Agreement that outlines how the business is to be dealt with in the event of separation. A Nuptial Agreement can outline how business assets are to be divided or perhaps that it is agreed that one spouse will retain the business and have the option to buy out the other spouse prior to any sale. A Nuptial Agreement can go so far as to exclude a business entirely from financial proceedings following a divorce.
It is important to remember that currently Nuptial Agreements are not legally binding and are one of the circumstances of a case that the court will consider. However, courts are giving them greater weight subject to certain steps being taken including full financial disclosure being provided and both parties having taken independent legal advice before entering into the Agreement.
Keep things easy and simple
A way of keeping business assets more separate from family finances is not to use the family home to raise any funds for the business. Also, do not to involve your spouse in the business. Do not employ them, appoint them as a director or secretary or give them any shares.
It is important to understand that none of the above steps are fail safe, but they would paint a clearer picture for a Judge if there was a dispute in the future that the intention from the outset was to keep the business separate from family finances.
What happens with business partners?
Finally, we are often approached with a query from business partners when their partner is involved in divorce proceedings. It is highly unlikely that any Order would be made that would negatively affect a third party although it is possible for the court to order that documents relating to a business are disclosed throughout proceedings which may be of a personal nature.
Again, you can plan for these eventualities when you go into business. You can put in place a Shareholders Agreement that sets out a method of valuation and places limits for example on the transfer of any shares. You can also have a Partnership Agreement to set out provisions in the event of one partner’s relationship breakdown. It is particularly important to do this if business partners decide to involve their spouses in the business.
Speak to a friendly family solicitor
If you wish to speak to one of our team about the new divorce reform and how the changes might affect you, please do not hesitate to contact us.
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