The business of business can be complicated. Kate Bouwmeester, Associate, explains how businesses are split in divorce.
Divorce itself is, relatively speaking, a simple, practical process. However, alongside the legal dissolution of your marriage, it is important to consider the division of finances. This is a separate process to the divorce, but it is extremely important that you legally dissolve your financial ties, which marriage or a civil partnership automatically interlink.
Coming to a financial settlement, and making this legally binding in the form of a financial consent order, can be complicated, and as a general rule, the more assets, and the higher value, the more complex matters can be.
Read more about the importance of a financial settlement.
Some couples will not only have to take into account matrimonial assets such as property, savings, investments and pensions, but businesses. Just like the other assets that are common features in financial settlements, it is possible for a business to also be considered as a matrimonial asset.
What counts as a matrimonial asset?
A matrimonial asset refers to assets accrued during the marriage, and non-matrimonial assets are those accrued outside of the marriage. Any non-matrimonial assets accrued pre and post separation must also be disclosed as part of any negotiation and may be used to meet the needs of the parties. It can be possible to ‘ringfence’ any non-matrimonial assets, i.e. keep them separate from the matrimonial ‘pot’ for division, and whether this is possible will depend upon the individual circumstances of the case.
So how do we deal with splitting a business upon divorce?
There are four main types of business structure:
- sole trader
- partnership
- limited liability partnership
- limited company
Some businesses are used as an income generating asset whereas other businesses hold assets of their own such as property, land, equipment or stock. Further, there are different levels of involvement in a business such as directors and shareholders. Even if a shareholder only has a minority interest in a business, that interest still has a value which may need to be ascertained by way of valuing the whole business.
It is important therefore that the detail of each individual business is carefully considered as part of the overall settlement. This is done through the process of financial disclosure. Even if your business is solely yours and your ex-partner does not have any financial interest in it, you need to disclose the relevant information so it can be considered properly in your financial negotiations. During this time you will likely need to consult with your own accountant to obtain sufficient information about your business for disclosure purposes, but it is also possible that a business valuation may be required from a jointly instructed independent expert.
Unfortunately, on occasion, one party misrepresents the value of the business, claiming it has little to no value when this is not the case. Tensions can run high in divorce, and this is especially true where there are complex assets that one or both parties feel they have claim to over the other. Seek immediate legal and financial advice if you believe your ex has falsified the value of their sole, or your shared business.
Whilst it is very rare that a business is required to be sold as part of a financial settlement, it can sometimes be necessary. The most common outcome is the transfer of shares from one person to the other. Other options include a lump sum to offset any value retained by the other party in the business, or spousal maintenance payments for a period of time. This will depend on the business structure, and your overall financial settlement.
Ideally, you and your ex would be able to negotiate without court intervention. There are various forms of non-court dispute resolution (NCDR), including mediation, arbitration or a private financial dispute resolution hearing (pFDR). However, if you struggle to come to an agreement, the court will step in and make an order which considers the overall settlement and ensures a fair compromise can be reached. Whether you come to an agreement using an NCDR method, or the court makes a decision for you, this will be written into your overall financial consent order.
Conclusion
It is important to seek expert legal advice when negotiating your financial settlement, particularly if you have complex assets such as businesses. A family lawyer can ensure you understand your position and recommend professional valuations.
