Many married couples run a business together. It is a great way to confirm a relationship. However, if that relationship comes to an end and results in divorce, problems can arise. Jointly run privately owned companies can be either as 50:50 shareholders and directors, or one spouse with the majority role. Often the other spouse takes a more domestic role. When divorce or separation comes along, there can be major problems for the company and the spouses. If there are other shareholders or directors, that can be an added complication. Those third parties can rightly become very anxious regarding their position in the company. How to divide business assets in divorce then becomes a real issue.
There are a number of issues to consider:
Control of the company
Often in a simple 50:50 shareholding, the company will effectively be “locked”. This would mean that neither the husband or the wife will be able to make decisions without the consent of the other. Advice should always be taken to see if there are ways to deal with this on a day to day basis whilst the divorce is in progress.
In the event of a dispute
A court has the power to transfer the ownership of company shares between spouses. This is subject to any restrictions laid down by the Articles of the Company. Where the finances of the couple do not permit a buy-out of the other spouse, the court will usually try to assist the couple in separating their business interests as forcing a couple to work together is unreasonable. However, if the couple want to stay in business together, a shareholders agreement needs to be drawn up to regulate the way the business is run. This would ensure that neither party can make major decisions. The future joint operation of a business between divorced spouses is likely to be problematic. A clean break is the usual choice of both sides. This would mean one party exiting the company by agreement.
One spouse exits the company
This can usually be done by an agreed transfer of shares or the company itself buying back the shares of the departing spouse. As there can be tax consequences for both spouses, specialist advice should be taken at the earliest opportunity.
When one spouse exits from a company, a valuation of the company needs to be undertaken. Depending upon the business, it may be possible to agree on this. If the business is complex, it will be necessary to use a specialist forensic accountant to value the business. A good valuation report can often assist the negotiations, enabling parties to proceed to a settlement. Please note a forensic accountancy report can be expensive so the cost must be included within the negotiation.
Valuing a Business during a Divorce
If you or your partner own a business outright or is a significant shareholder, a valuation of that business will be required. This valuation will be included as part of a financial settlement in the divorce.
The valuation can be a complex process as it depends upon:
- Income from the business
- Business assets such as property, stock, machinery, vehicles etc.
- The value of any pensions
- Whether or not it is possible to extract capital sums from the business
- Whether or not it is possible to borrow money against the business or its assets
- The ownership structure of the company
As the valuation is a complex task, it is strongly recommended that a specialist accountant is consulted to provide an accurate valuation.
If you can agree with your spouse or partner on the value of the business, then the process will be more straightforward and less costly. However, many divorcing couples don’t agree on the value of business assets, particularly if one partner appears to be undervaluing them.
What happens after the Business is valued?
Once the business is valued, how it is treated by the court is dependent on the ownership structure. If, for instance, it is owned outright by one or both spouses, it will be treated as another marital asset. If, however, it’s owned by a group of people and the divorcing spouse is a minority shareholder, it is merely the value of the shareholding that is relevant.
The courts will avoid the breaking up the business. In most cases, the business owner will usually be left with the business. The other partner will be compensated with a larger share of other assets or maintenance payments. It is also possible to split the income or shares to equally provide for both parties.
Dividing business assets after a divorce can be a minefield, adding to what is already a turbulent time.
If things are amicable with your spouse, and the division of the business is straight forward, you can define that division can be drafted in a consent order.