What Are My Rights Regarding Family Business & Divorce?
As North West divorce solicitors specialising in resolving financial disputes after a separation or divorce, we spend a significant amount of time addressing ownership and the treatment of business assets.
If you own shares in a family business or are a partner in a limited liability partnership, or a sole trader, or a spouse whose partner has business interests, then Evolve Family Law has the expertise and experience to help you negotiate a fair financial settlement even where business assets are considered complex or non-realisable.
Family assets or business assets
Many people assume that if they split up from their spouse, their business assets are ring-fenced and will not form part of the financial settlement. That isn’t the case. In divorce financial settlement proceedings, the court can order the valuation of a business and the sale or transfer of company shares.
Is a business asset a family asset or a non-matrimonial asset?
A business can be either a family or matrimonial asset or a non-family or non-matrimonial asset. If a divorcing couple cannot agree on the status of the business, the family court can rule on whether the asset is a family or non-family asset. The answer will depend on the family circumstances.
The distinction of whether a business is a family or non-matrimonial asset is important because the value of the business may exceed the equity in the family home, any savings or the value of pension funds.
The court can hold that business interests are a family asset even if the shares in the family business are owned solely by one spouse, and the other spouse has had no day-to-day involvement in the business.
If a couple agrees or the court orders that a business is a family asset, the court can share the business’s value by selling or transferring it, or by offsetting its value. Offsetting means the non-business-owning spouse receives a larger share of the equity in the family home, investments or pensions.
If the business asset is deemed to be a non-matrimonial asset, then the court will only share its value with the other spouse if it is necessary to do so because the division of the family assets is insufficient to meet reasonable needs. A spouse’s reasonable needs may include housing for themselves and minor children. For example, if the equity in the family home is £500,000, and the shares in the family business are worth £3 million and the spouses will each need £500,000 to rehouse themselves.
Legal advice when you are divorcing, and there are business assets
It is therefore important to get specialist advice from a Manchester divorce solicitor on business assets within divorce proceedings so that you understand:
- The relevance of business assets to your financial settlement.
- How to get the business asset accurately valued.
- The options on how to reach a financial settlement where there are business assets.
Tips for those who are divorcing with family businesses
Here are some tips on what you should consider if you are divorcing and either you or your spouse has business assets:
- Make sure that the business is accurately valued. The choice of valuation method may significantly affect its value. The value of a shareholding may be affected if it is a minority shareholding or has limited voting rights.
- Take legal advice on the best person to value the business. It could be the existing company accountant, business advisor, or a forensic accountant.
- Understand the tax implications of agreeing to a sale or the transfer of shares.
- If you are an employee of the company, make sure that the financial court order deals with your employment status and any tax implications of terminating the employment.
- If you intend to continue in business with your former husband or wife, ensure that, as well as obtaining a financial court order, you also regulate the new business arrangement with a new shareholder agreement or partnership agreement.
Business valuations in financial settlement negotiations or court proceedings
There are many different methods of business valuation. These include:
- The net book value.
- Multiple of profit.
- Capital value or a combination of value and profit.
Getting the valuation method right can make a significant difference to the size of the financial settlement.
If the net book value is used, the valuer must be satisfied that the assets are correctly valued in the business accounts. Sometimes the assets are included in the accounts at an artificially low figure, or the assets have not been revalued for some years.
If a business valuer is valuing a shareholding using a profit multiple, this can be difficult, as profits may have been overstated or understated in the accounts. In addition, the accountant needs expertise to understand the appropriate multiples for the business sector.
Employment in the family business and divorce proceedings
A spouse who was a ‘sleeping partner’ or an employee in the business during the marriage to maximise the tax advantages to the family may find themselves with unexpected and unwelcome tax liabilities unless their family solicitor and financial advisor explain the consequences of exiting the business and put protection strategies and liability cover in place in the financial court order.
If a business owner negotiates to retain their business as part of their financial settlement, they may find they have an unexpected business exposure if their ex-spouse does not agree to resign from the company and to forgo any employment law claims in the preamble to the financial court order. This point is important, as some former spouses who remain employees of the business can bring an employment tribunal claim without a limit on the employer’s liability for discrimination. The claim can be prevented if the employed spouse agrees to forgo any such claims as part of their divorce settlement.
If a spouse is reliant on income from the business to meet their outgoings, the financial settlement can still include the transfer of their shares, the termination of their employment and the payment of lifetime or time-limited spousal maintenance. If the spouses are nearing retirement, the financial court order could include a pension-sharing order, so the financially stronger spouse shares their pension income while retaining the business in the financial settlement.
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Family business protection in financial court orders
When a husband and wife agree to separate but want to continue operating the family business together, the agreement must be properly documented to avoid disputes and minimise the risk of a future falling-out. Protection can take the form of written employment contracts, a shareholder agreement, and a family financial court order. These documents provide checks and balances, such as recording the agreed policy for declaring dividends or for employing new staff, ensuring both spouses have legal protection. With these documents in place, many spouses can work together successfully even if they can’t continue living together.
Prenuptial agreements and their role in protecting business assets
A prenuptial agreement (or a postnuptial agreement if a couple is already married) can sometimes be the ideal solution to protect business assets from financial claims in divorce proceedings. A prenuptial or postnuptial agreement can try to ring-fence the business completely from claims in divorce. If this is not possible, the agreement can include provisions to protect the family business in the event of a divorce.
When it comes to the business of divorce, it pays to get the right legal help from experienced and expert divorce solicitors, such as Evolve Family Law.
