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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.

The best way to find out what will happen to your business if you divorce is to contact our specialist divorce solicitors

Divorce and Separation

Your Free Guide

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.

What approach is taken to business interests?

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.

What will happen to the business interest?

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 resulted in asset divisions weighted in favour of the wealth creator as happened in the divorces of Sir Paul McCartney, Sir Terence Conran, and a Mr Cowan, who invented the black bin liner with a drawstring! It has to be said that the other spouses in these cases were still very well provided for financially.

What about the taxman?

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.

Valuing the business

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.

How can I protect my business from a claim arising from divorce or separation?

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.

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