One of the most frequent questions that my clients ask is how does the court approach a business on divorce?
If the divorcing parties cannot agree, then the court will have to find a way to answer this question. Business assets often make up a substantial proportion of the total assets on divorce, so this is an important issue.
Navigating business valuation – key considerations in divorce proceedings
The first hurdle is always to establish how much the business is worth and there are conflicting approaches which can result in vastly different valuations. Experts can offer different opinions, and the valuation exercise itself can be extremely expensive and complicated. For example:
- How do you value a poorly performing business which is going through hard times but has a proven record, so it has good chances of recovery?
- What does the business own, including property or other assets sitting on the Balance Sheet? Have those assets been properly valued, or do the valuations need to be refreshed?
- What income is the business likely to generate in the future and does the other party hope or want to enjoy a share of that income?
- Is there a market to sell the business but be aware that any sale will probably destroy any income stream derived from it.
An interest in a business is quite different to the value of cash in the bank, the family home or pensions and courts tend to treat businesses as being more risk laden.
The expert will also advise on if and how cash can be extracted from the business, and the tax consequences of these options.
Even if one of the parties is not a shareholder in the business, the value attributed to the business will not be automatically excluded from consideration on divorce and the court has wide discretion to look behind the company structure and treat its assets as matrimonial assets.
Business asset division in divorce – courtroom strategies and solutions
Once the court has grappled with the issues of valuation and liquidity, it could:
- Divide the shareholdings in the business, so they are transferred between the parties and each still retains a shareholding in the business after the divorce
- Order a sale of the business.
- If one of the divorcing couple owns the business, the court may support keeping that business with them, and the other party is compensated with a share of other assets, which is known as “offsetting.” In this scenario, it is sometimes argued that it would be unfair to leave one party with all the shares, which are inherently risky, and allow the other to retain a larger portion of the liquid assets. To allow for this, it is common for courts to apply a discount to the value of the shareholding retained by that party to reflect the fact that the value of the business is more uncertain than the other assets;
- The court is under an obligation to consider a clean break in every case, but in some cases, there is little option save for both parties to retain a shareholding in the business to share the risk. If one party has day to day control of the business, then a new class of shares could be created to the hands-off spouse to provide them with an income but to ensure that they do not have any voting rights. This will hopefully limit the level of influence that the ex-spouse can exercise over the business.
- Order that the party who retains the business pays maintenance to the other by way of pay out over a fixed period.
- Order a deferred pay out, so the non-owning party receives a share of the proceeds of sale if the business is sold at a future date.
All of this illustrates how important it is to obtain early advice and serious consideration should be given to a prenuptial agreement, which are gaining favour with the courts.
Elizabeth Saunders is a Partner in our Family Team, specialising in high net worth and complex family disputes arising on divorce, or between unmarried couples and within wider family relationships. This includes issues with trust structures, inherited wealth, and family businesses during divorce or separation.
Known for her strategic and constructive approach, she is also an excellent litigator and adept at negotiating and drafting pre- and post-nuptial agreements.
If you have any questions about the above, or if you require tailored advice, please get in touch with Elizabeth here.