What Happens To Your Business If You Divorce?
More people than ever are choosing to say adieu to corporate culture, office politics, and cubicles and go into business for themselves. According to the Office of National Statistics (ONS), the number of self-employed increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017.
Whether you have set up a Mom & Pop enterprise with your spouse, launched a digital start-up, or are working on a freelance/consultancy basis, a key concern of self-employed people going through a divorce is “what will happen to my business”. Given the time you need to devote to growing a company and nurturing customer goodwill, it is fair and reasonable that you will want to protect that which you have put your heart and soul into for years.
The first thing to remember when considering how your business will be impacted in a financial settlement is not to panic. Courts fully understand that the success of a small and medium size enterprises (SMEs) impacts not only the couple themselves, but employees, customers, and the community at large. Therefore, it is highly unlikely you will be forced to sell your venture. In addition, most financial settlements are worked out between couples themselves. And it is your Solicitors job to support you and your spouse to reach a settlement in a non-confrontational way, through alternative dispute resolution methods such as round-table negotiation and/or mediation. This is especially true if your family lawyer is a member of Resolution.
Asset or income? – How the Courts will treat a family business
How a family business will be treated by the Court depends on many factors. For example, if it is a simple freelance operation which provides the family with an income, it is unlikely to be viewed as an asset. However, if it has value, it will be considered by the Courts when it looks at the couple’s resources; however, it is not a liquid asset, like shares or savings. Therefore, it will be treated differently. Extracting the asset value of a business can be complex, whether or not it has off-shore interest, and there are often tax implications involved.
If the business has ‘capital value’ the court will appoint an accountant to value the enterprise. Valuations can be difficult to assess. Napoleon called England a nation of shopkeepers for a reason; most businesses are owner-operator ventures with less than 10 employees. Therefore, when a business is valued, consideration has to be given to whether it would be viable without the major shareholder running the operation. A valuation can be made on a sole trader or partnership business, with the same principles applied as those used when valuing a company. Obviously, different business structures have distinct tax implications – these will be taken into account by the valuer.
If the business is a company and both parties to the divorce are shareholders, the Court can order the transfer of shares from one party to another.
Ringfencing part of the business from the financial settlement
If you started your business prior to marrying or your spouse has little or no involvement in the venture, it is natural you will feel it unfair that they should be awarded a large chunk of your hard work. If you find yourself in this situation, the most important thing to remember is that you have a duty to provide full and frank disclosure to the Court regarding your finances. Never try and hide or dispose of assets or cash to avoid them becoming part of the financial settlement; the consequences for doing so can be severe, both financially and reputationally.
Whether or not part or all of the business can be ring-fenced away from the matrimonial assets which need to be apportioned between each spouse will depend on the considerations the Court must make under section 25 of the Matrimonial Causes Act 1973. If the other spouse’s financial needs can be met without needing to use funds generated from the value of the business, then it is possible to keep it separate from the settlement.
Another approach, if it transposes that the business does become part of the financial settlement, particularly where the business forms the main part of the matrimonial assets, then the question following the valuation will be one of ‘liquidity’, that is, can the business raise the cash required to pay the sum to the other party as part of the settlement? A business can be ordered to pay in a lump sum or in instalments, depending on cashflow. If capital cannot be raised to pay a lump sum or to cover instalments, ongoing income from the business can be taken into account when it comes to working out spousal maintenance.
In most cases, the spouse who has been involved in running the business will be left with it, and they will pay out a sum to the other spouse. It must be emphasised that this is normally worked out between the couple, it is rare for the Courts to get involved. However, it is important to seek expert family law advice, especially if you wish to ringfence part or all of the business away from the financial settlement.
With the right advice and a positive attitude, there is no reason why your business cannot continue to thrive following a divorce.
Bennett Griffin are award-winning Solicitors based in West Sussex. From our office in central Worthing our experienced and specialist Solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Please contact us on 01903 229 999 or by email at firstname.lastname@example.org for more information.