How is a business treated in a divorce?
The simple answer is: it depends. The treatment of a business in divorce proceedings can vary based on several factors, such as:
- Whether the business has a value
- The size and structure of the business
- The purpose of the business (e.g. income-generating or asset-holding)
- Whether there are plans to sell the business
- The level of ownership or interest involved
This article outlines the key steps taken to determine how business assets are considered during divorce.
Step 1: Financial Disclosure
When a divorcing couple begins the process of reaching a financial settlement, the first step is usually to exchange financial information (often referred to as financial disclosure).
This is typically done using a Form E. The Form E includes a specific section on business interests and asks anyone with a business interest to provide:
- Business accounts for the last two financial years
- Any documents used to estimate the value of the business provided (e.g. an accountant’s letter or more formal valuation)
Although a full formal valuation isn’t usually submitted at this stage, whether one should be obtained is something to discuss with your solicitor.
Do You Need a Formal Business Valuation?
A formal valuation is generally necessary if the business is believed to have a value.
Some businesses, such as those operating as sole traders, without assets or repeat contracts, might have little to no value. On the other hand, companies with assets, employees, shareholders, and high turnover might have significant value.
These formal valuations are usually arranged jointly, with an independent accountant being formally asked to provide a valuation by both parties.
If the business has no value then there is no value to divide between people. However, if the business is still a source of income, it may well be relevant to assessing:
- Mortgage capacity
- Child maintenance
- Spousal maintenance
If people can’t agree on whether a valuation is necessary, a court or arbitrator may need to be asked decide.
What Will the Independent Accountant Do?
The accountant’s role is to assess the value of the business interest, typically based on what it would sell for on the open market.
They may also be asked to provide insight on:
- Whether the business owner can extract cash from the business
- What a reasonable salary might be
- Tax implications of selling shares or raising money through the business
The accountant decides the valuation method depending on the type of business. It may be based on:
- Net assets (e.g. property-owning businesses)
- Profitability or income generation
- Or a combination of methods
If the person owns a minority share, a discount might be applied to reflect the lack of control.
The accountant may request additional documents or ask questions during the process. Having financial records ready helps avoid delays and keeps costs down.
What Happens After the Valuation?
Once the valuation report is shared, both parties can:
- Ask questions
- Clarify parts of the report
- Challenge the information in the report(sometimes by seeking a second opinion)
It’s important to understand that in court proceedings, the final decision on the value lies with the judge, not the accountant. The report is influential but not binding on a judge.
If an agreement on the financial division can be reached using the valuation, the process may conclude there. If not, things might proceed to arbitration or court for a decision.
How Can Business Interests Be Divided in a Settlement?
There are several ways to factor business interests into a divorce settlement:
- Offsetting
One person keeps the business interest, while the other receives more of the remaining assets (e.g. property or savings). Business value can be uncertain, so a discount may be applied to reflect the risk as compared to say property or cash. - Selling the Business
The business may be sold, with proceeds shared. This is rare (especially if the business is a key source of income) and usually only happens by mutual agreement, if the business is going to be sold anyway, or if no other option is viable. - Sharing Business Interests
Shares may be transferred from one spouse to the other. Although courts prefer a clean break, shared ownership may be considered or needed to ensure fairness. - Transferring Interest
If both parties are involved in the business, one might transfer their share to the other and receive additional assets as compensation.
The best approach depends on the overall financial picture and what both parties value most.
Final Thoughts
This guide gives an overview of how business assets are dealt with in divorce, but each set of circumstances is unique. Reaching a fair outcome involves looking at the full financial picture, not just the business itself. Advice should be taken on individual circumstances.
Carrie Rudge has extensive experience supporting clients with a wide range of business interests, from sole traders and family run operations to international companies and agricultural businesses.
If you’re going through a separation and need advice, Carrie will be very pleased to help. You can call her on 07476 012552 for a confidential chat.