You might have spent years building up a business. Could it be threatened by your divorce settlement? When it comes to a financial settlement, a business asset is generally treated like any other property such as a family home. It will usually be brought into the calculation when dividing property. However, the courts will only reluctantly order the sale or transfer of a business interest. Judges will try not to make any financial order that could ultimately jeopardise the viability of a business.
Possible orders include transfer of shares or interest in a partnership/sole trader business and payment to one spouse of a lump sum to offset the value of the business interest. Where raising such a lump sum would be difficult without putting a strain on the business finances the courts may order that the amount be paid in instalments.
How Is A Business Asset Valued For A Divorce Settlement?
Both spouses will often have to agree to engage a forensic or specialist accountant to value the business asset, taking into account:
- The value of the capital assets of the business
- Income, profit and loss
- The structure of the business
- Tax consequences of any share disposal or other change in ownership
- The overall health of the buisiness
- Future income
- Value of any company pension
- Impact of change in ownership on other shareholders or partners
Even where the nature of the business is uncomplicated, any valuation will have to take into account the impact of the divorce. For example, might the goodwill of the business by affected if one spouse leaves the business or steps back from day- to- day involvement? This may be particularly relevant in a family business where both sides had played active roles in the enterprise before the breakdown of the relationship.
An accountant’s report will ascribe a value to the business – usually allowing for different scenarios and outcomes. The report is then used in negotiations for a financial settlement or as a guide for any judge making a financial order. Whether the business or interest is transferred to one spouse or is used to offset the value of another marital asset will depend on the overall context of the financial discussions.
We Have A Family Business: Will It Have To Close After Divorce?
The family courts won’t willingly make an order that would have the effect of shutting down a viable family business. This would be in no one’s interest. Your family law solicitors will have this in mind when negotiating with your spouse and his or her legal advisor.
What if the sale of some of the business assets to facilitate a fair financial settlement (or the need to immediately pay a large lump sum to one spouse) would jeopardise the business?
In such circumstances the courts may look at other ways of achieving a settlement, for example ordering the payment of ongoing instalments until the agreed value of the receiving spouse’s share has been discharged
How Do Courts Treat Business Income Generated Post Divorce?
Where, as a result of a financial settlement, one spouse takes on sole ownership of a business, does the other spouse have a right to share in the income generated by the business in the future? After all he or she may have been largely responsible for building up the business in the first place.
This point was raised in the 2019 case of O’Dwyer where the matrimonial assets included a McDonald’s franchise that generated around £1million in annual income. In the lower court the judge remarked,
‘why after divorce should only the husband continue to live well upon it (the business) when clearly it is the product of matrimonial endeavour?’
The judge then proceeded to make a financial order that treated the future income as a matrimonial asset that the wife could continue to benefit in. This view was however rejected outright when the husband appealed. The High Court was clear that it is now settled law that future income cannot be shared.
The O’Dwyer case highlights the importance of getting accurate valuations of business assets: Mrs O’Dwyer’s share in the matrimonial pot was based on a valuation of the franchise which already took into account future profit/income. If she were then to receive future income from the franchise she would effectively be benefitting twice.
Comment
Any interest in a business will in the normal course of events be included in the matrimonial pot used to calculate a financial settlement. The structure of the business, the business assets and the way the business interest is held (via a company or as a partnership for example) all raise complex issues. These matters must all be considered when it comes to valuing the asset and deciding how to apportion any benefit on divorce without damaging the underlying asset. Professional financial and legal advice is always advisable in these circumstances.