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How is a business divided in a divorce?
- AuthorSam Miles
Dividing your matrimonial assets in a divorce will be difficult and complex depending on the assets accumulated during your marriage. This can be more complicated if there is a business. Sam Miles, Partner in our Family Law team, discusses here the key considerations you need to make in this situation and offers her advice as to the best steps to take.
Key considerations when dividing business assets in divorce
Many business owners will worry about the value that may be ascribed to their business interests, and the impact of such a valuation on the financial settlement to be made within their divorce.
There are many types of business. Some are small, comprising just one individual working on a self-employed basis as a sole trader or through a limited company. Those types of business often have no value beyond the income stream they generate; if you take the person away, the business itself has no value in it’s own right.
Other types of business can have a value independent of the people working within it. Those types of business will need to be valued unless the valuation can be agreed. Valuing a business is a technical piece of work and it will usually be necessary to instruct an expert to carry this out. It is desirable for that expert to be jointly instructed by both parties to act as a Single Joint Expert. In this way their impartiality is ensured, and neither party can argue that the valuation is biased towards the other.
How is a business valued for the purposes of a financial order?
Most businesses are valued in one of two ways; on a net asset basis, or an earnings basis. The correct approach depends on the nature of the business:
- Usually, businesses which have significant assets, such as property holding companies, are valued on a net asset basis which is the value of the business assets minus the value of the business debts. Occasionally, it is necessary to have the specific assets owned by the business valued. This is especially so where the assets are property based.
- Businesses which generate income from trading are usually valued on an earnings basis. Typically, this approach requires the expert to assess the likely future earnings of the business, and then apply an appropriate multiplier to that figure. Recent trading performance is usually taken into account as well as information from the business owners about what they consider the future may hold for the business. The expert will also bring their own independent knowledge of the particular sector into consideration. This is an art, not a science.
There then needs to be a consideration of the tax that might be payable if the business were to be sold. This is because the Court will only take into account the net value of the business when considering a fair settlement.
If the spouse is not the only owner of the business, further consideration will need to be given as to how the spouses individual share is valued. This will involve considering if they are a minority shareholder.
Valuing the business and arriving at a figure is not the end of it. Consideration then needs to be given as to whether the spouse can actually realise their interest, ie. its liquidity. Can the business afford to pay out any sums and continue to operate? Tax consequences of taking money out of the business will also need to be considered.
If the business has little or no liquidity then the Court will need to take this into account when considering what would be a fair settlement. This might mean an arrangement which sees any payment being made over the course of time in instalments, or business interests being offset against other assets in the marriage (usually the equity in the family home).
Acquiring a business valuation will be a lengthy process and is only the first step. Once that figure has been obtained it will then form part of the overall landscape of the matrimonial finances. Discussions can then take place as to how the financial matters can be settled. If settlement proves impossible, the Court will ultimately be able to determine the matter and make any necessary orders.
If you are not able to agree on matters including the valuation of the business, Family Mediation may be a useful option for you to consider if you wish to avoid having to ask the Court to determine the issue. During these sessions, you will meet with an independent Mediator who will assist you in coming to an agreement through open discussions and a facilitated conversations, allowing both you and your spouse the opportunity to talk, listen to the other’s perspective and come to a mutual decision.
We can help you understand the process involved and have many years experience in negotiating matters of this nature. To discuss your situation with Sam or a member of the Family Law team, you can contact us today on 023 8071 7431 or email firstname.lastname@example.org.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.