Gemma Kemp and Anisha Ali, in our Family Law team, discuss how business assets are treated on divorce.
For many business owners, their company represents far more than a financial asset. It is often the product of years of hard work, investment, risk-taking and personal commitment. Unsurprisingly, one of the first questions business owners ask when divorce is on the horizon is: what will happen to my business?
The good news is that divorce does not automatically mean a business must be sold. However, business interests are often among the most valuable assets within a marriage and will usually form part of the financial discussions during divorce proceedings. Seeking specialist legal advice at an early stage can help you understand your position and protect both your personal and business interests.
How is a business treated on divorce?
When determining financial arrangements on divorce, the courts in England and Wales consider the parties' overall financial circumstances and seek to reach a fair outcome. A business interest may form part of that assessment, whether it consists of shares in a limited company, a partnership interest, a sole trader business or another commercial venture.
Where a business was established or significantly developed during the marriage, its value may be regarded as part of the wealth generated by the parties during their relationship. This can be the case even where only one spouse is actively involved in running the business or is the legal owner of the shares.
The position can be more complex where the business was established before the marriage, inherited, or received as a gift. In such cases, the court may consider factors including the history of the business, the extent to which it has grown during the marriage, the source of its value and, importantly, the financial needs of both parties and any children.
Every case turns on its own facts, and the way a business is treated will depend on the wider financial picture.
How is a business valued?
Valuing a private business is rarely straightforward. A company's value cannot usually be determined simply by looking at its latest accounts or balance sheet. Depending on the circumstances, an independent expert may be instructed to provide a valuation and assist the parties or the court in understanding the true worth of the business.
A valuation may take account of:
- the company's profitability and trading performance;
- its assets and liabilities;
- future growth prospects;
- the ownership structure;
- the marketability of the owner's interest; and
- whether the shares could realistically be sold.
An important consideration is liquidity. A business may appear valuable on paper, but that does not necessarily mean its owner has access to equivalent cash. Releasing significant funds from a business could affect working capital, inhibit future growth, or even threaten its ability to continue trading successfully.
Tax implications must also be carefully considered. A settlement that appears sensible in principle may prove impractical once the tax consequences of extracting funds or transferring assets are taken into account.
Will I have to sell my business?
Not necessarily. In many cases, other ways of achieving an appropriate financial settlement can be explored.
The courts generally recognise the importance of preserving a successful and income-generating business wherever possible. As a result, there are often alternative ways of achieving a fair financial settlement without forcing a sale.
Possible solutions include:
- the business owner retaining their shares while the other spouse receives a greater share of other assets;
- payment of a lump sum by instalments over time rather than as a single immediate payment;
- the use of deferred arrangements in appropriate circumstances; or
- structuring a settlement in a way that enables the business to continue operating while meeting both parties' financial needs.
The most appropriate solution will depend on factors including the value of the business, the availability of other assets, the parties' income needs and the overall circumstances of the family.
How can business owners protect their position?
Although no one enters a marriage expecting it to end, sensible planning can help reduce uncertainty and minimise future disputes.
Business owners may wish to consider:
- Pre-nuptial and post-nuptial agreements
Pre-nuptial and post-nuptial agreements can help clarify how particular assets, including business interests, should be treated if the marriage breaks down. While not automatically binding, the courts will often give significant weight to properly prepared agreements.
- Maintaining clear financial records
Accurate and comprehensive documentation can be invaluable, particularly where a business was established before the marriage or where external investment, inheritance or gifted assets have contributed to its growth.
- Reviewing corporate documents
Shareholders' agreements, articles of association and partnership agreements should be reviewed regularly to ensure they contain appropriate provisions relating to ownership, valuation and transfer of interests.
- Taking early legal advice
Obtaining specialist family law advice at an early stage can help business owners understand the potential implications of divorce, avoid costly mistakes and make informed decisions about both their personal and commercial affairs.
How we can help
Divorce involving a business requires careful navigation of family law, valuation evidence, taxation considerations and commercial realities.
Whether you own a family business, hold shares in a company, or are involved in a partnership, obtaining specialist advice at an early stage can help protect what you have built while working towards a fair and sustainable financial settlement.
Our experienced family law team advises business owners, entrepreneurs and professionals on all aspects of divorce and financial arrangements. We work closely with accountants, valuers and other professional advisers where necessary to help clients achieve practical solutions that safeguard both their future and the ongoing success of their business.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
