Businesses in Divorce Proceedings
Further Information
Businesses form a central part of financial proceedings on divorce.
The Courts routinely ask that businesses and business interests be valued, as part of the Financial Disclosure exercise.
There is a danger that an unrealistic amount of emphasis will be put on the value of the business, when dividing up the family assets. This can lead to real problems in practice.
When there is a divorce, the Family Courts take precedence over the Commercial Courts when deciding what to do with business ownership.
Finding out how much the family assets are worth is a crucial part of financial disclosure. Knowing how much is “in the pot” is the first step, before then dividing what there is.
Valuing businesses is far harder than, for example, valuing properties. There are far fewer businesses being bought and sold, so it is far harder to know what somebody would pay for a business.
If a business is involved on divorce, the question of valuation will arise early on. At the first appointment, the court may well give directions.
Usually, the court prefers to appoint a single joint expert – a specialist accountant who will be appointed by both parties jointly to value the business. Other issues, like the ability to raise money through the business, or future profitability, can also be considered.
Having a joint expert undoubtedly keeps the cost down. But in a difficult area like business valuations, it can be a subjective process.
Sometimes it can feel as though the valuation is too low and bears little resemblance to the lifestyle the business provides.
At other times, the valuation can appear very high, set at an optimistic level, given the absence of prospective purchasers.
Given how variable valuations can be, it is easy for too much reliance to be placed upon them – especially if the other spouse is being given hard cash or property of a similar value. The courts are more alive to this now – see the court’s approach.
Getting separate accountants to value the business will need the permission of the court.
It may be justified if:
- there is a substantial gap between what the accounts show, and the lifestyle involved;
- there are substantial fluctuations in the company figures, without adequate explanation;
- the business owner is not straightforward in supplying information and figures; or
- there are good grounds for believing that the business is being manipulated because of the divorce.
What are you trying to achieve – what do you want the court to do with the business?
A lot depends upon whether you are involved in the business, or whether you are outside the business but want to share the financial benefits.
Early on in the case, you will need to think about what you want to happen:
- do you want to keep control of the business;
- do you want the business interests to be shared, with shares being reallocated;
- is it a question of sharing income, and if so, would that be from dividend income, or from maintenance;
- do you want the business sold;
- do you want the business to be passed on to the next generation;
- do you want to sell the business on retirement?
Each one of these approaches needs to be justified to the court. Much depends upon what type of business it is, and how it has built up. Much also depends upon your respective attitudes to trust and working together after divorce.
Historically, the courts have tended to leave the business owner with the business, and compensate the other spouse with a larger share of the assets and/or maintenance.
Very often, this coincided with what the couple themselves wanted – particularly the business owner.
The difficulty of this approach is knowing whether or not it is fair – it is difficult to value businesses, and they may or may not do well in the future.
More recently, since the case of Wells v Wells in 2002, the courts have been more alive to sharing risk:
- why should one person have all the business risk, and the other keep more of the property and liquid capital – which is not so risky;
- why should one person have assets which are easy to sell and liquid, and the other person have a business which is difficult to sell?
With this new approach, the courts are more willing to share the ownership of businesses after divorce – provided this is not a recipe for conflict. Much depends on all the other factors within the marriage and within the business itself.
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