When dividing the assets of a divorcing couple, the family court will want to know about all of the assets that each party has and their value. This includes business assets such as stock, property, intellectual property and more.
But what happens to these business assets in a divorce? Is my ex-partner entitled to any of the assets? And how do I protect my business?
In her first article for the firm, Family Law Partner Rosie Sharp answers these questions and more.
What is matrimonial property?
Generally, matrimonial property is any property or asset which has been created or bought by either or both parties during their relationship as a result of their combined or individual efforts.
These types of assets are available for a court to divide between the parties in divorce.
Non-matrimonial property, on the other hand, is generally any property that was created or bought by one of the parties before the marriage and brought into the marriage. If savings were acquired by one party before the marriage, for example, those savings would be considered non-matrimonial.
However, certain assets can be regarded as matrimonial even if they were bought or created before the marriage, such as the family home if the parties lived there together as a married couple. Non matrimonial assets can also be called upon to meet one of both parties’ needs in a divorce.
Is a business classed as an asset in divorce?
Yes, in divorce proceedings involving a business, the business is considered an asset regardless of whether you are a sole trader, shareholder in a limited company or a partner in a partnership.
The family court are likely to take the value of your business into account when dividing the family’s assets between you and your spouse.
Is my ex-partner entitled to my business?
The Court’s main goal, above all else, is to achieve a ‘fair’ outcome, which might not always equate to assets being split ‘equally’.
They will consider a number of factors including each spouse’s contribution to the business, standards of living, financial needs and the value of the business.
Who will value my business?
This will depend on various factors, including the size and purpose of the business and whether the parties can agree how it should be treated.
For a small business, the parties could do the valuation themselves, or agree that the company accountant can assist by looking at the assets, cash flow or analysing comparable companies. However, people generally prefer to get an independent valuation.
Couples often jointly instruct a forensic accountant to conduct an independent valuation of the business. In such cases, both parties will be liable to pay for the valuation.
Where a couple’s relationship is amicable, they can also jointly apply for divorce. Find out more about how this works here.
How is a business valued in divorce?
Valuations of private companies should be approached with caution and have been described in case law as being ‘among the most fragile valuations’.
There are several different methods of valuing a company, but the most common are as follows:
- Net Assets Basis - a valuation of the business’ assets
- Earnings Basis - based on the potential future income from the business when historical profits are taken into account
- Market value – based on the value of similar companies
The method of valuation will depend on the company and its sector.
When valuing on the basis of earnings, there is a risk of double counting if child and/or spousal maintenance payments are to be paid from future business income to a former spouse. In such circumstances, the value of the shares in the company may be taken into account.
Small family businesses are often used as a way for one or both parties to receive income in a tax-efficient way. In such cases, the overall value of the business, aside from the worth of its assets, bank balances and the future income derived from the business, is typically quite small.
Is my business a matrimonial asset?
As we mentioned earlier, your spouse may be entitled to half the value their spouse has of an ‘interest’ in any business, even if it was acquired or set up before marriage.
The Court of Appeal has decided that taking the fairest approach when valuing a pre-marital element of a business is crucial.
Equally, if the value of the business has increased after separation, then consideration will have to be given to whether or not the business owner has significantly added to the value by their efforts (rather than passive growth of a matrimonial asset).
What happens to a limited company in a divorce?
What happens to a limited company in divorce will very much depend on the size and makeup of the company.
Often married couples both have shareholdings in a company but, after divorce, it is unusual for both parties to still have those shares; as the conflicts that could potentially arise would make the effective management of a business more difficult.
A specialist Family Solicitor can assist you in finding the most business-savvy and cost effective way to untangle your company’s ownership in divorce. At Frettens, our team would be happy to discuss your circumstances with you over a free initial chat.
Alternatively, if you’re looking for guidance on offloading your shares and selling them back to the company, you can read our dedicated article here.
How do I protect my business in a divorce?
The Court can make a financial order to clarify how all assets, including businesses, are to be shared.
This will create a legally binding agreement between you and your ex-spouse, with consequences set out for breaching its terms.
This can be beneficial as, once an order approved, it can be very difficult to change and neither party can make a new claim against the other.
Plus, either party can take the agreement back to their solicitor or the Court to enforce any of its terms if they are not fulfilled. Find out more about financial orders here.
You might wish to attain a clean break consent order, which will completely resolve the financial issues between you and your ex-spouse and make you financially independent from each other. Read about clean break consent orders here.
Specialist divorce and business solicitors
At Frettens, we have one of the largest and most experienced Family Law and Business departments in the conurbation.
The team can assist you in reaching an amicable divorce, securing your finances and ensuring the best future for you and your business.
You can call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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