Divorce and Business – Must it Spell Disaster?
Our experienced family law team look at the issues around business and divorce.
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.
Divorce and Separation
Going through a relationship breakdown can be difficult enough without confusing legal jargon and worries about the process. Our free guide walks you through the divorce process, the first 3 steps you should take, and the different routes available to get the best outcome.
Business interests can take different forms, such as 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. 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.
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.
In a very few cases, the court has had regard to ‘stellar contributions.’ These result in asset divisions weighted in favour of the wealth creator.
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.
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.
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.
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.
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.
If you are worried about the financial implications of protecting your business from a divorce or separation or need urgent legal advice, contact our team on 01273 604 123 or fill out our online enquiry form.