DIVORCE AND THE FAMILY BUSINESS

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1 DIVORCE AND THE FAMILY BUSINESS

2 FAMILY LAW Family, Personal & Financial Solicitors EMPLOYMENT FAMILY & MATRIMONIAL INTERNATIONAL PROPERTY REGULATORY & WHITE COLLAR CRIME RESIDENTIAL PROPERTY WILLS, TRUST & ESTATE PLANNING LEAFLETS IN OUR FAMILY RANGE ARE Alternatives to court Divorce Civil partnerships Pre-nuptial agreements Arrangements for children The facts about cohabitation Costs in the family department The financial aspects of divorce Divorce and the family business Protecting wealth on divorce through trusts Occupying the family home and protection from domestic abuse Interfacing with the Child Support Agency and the Child Maintenance Service Taking financial advice during divorce

3 INTRODUCTION We specialise in divorces and relationship breakdowns which involve family businesses. We are able to provide accurate and clear advice on how interests in such businesses are treated within divorce proceedings. We have extensive experience of dealing with limited companies, publicly listed companies, partnerships and sole traders. The most common questions arising in respect of businesses are: To what extent is the business taken into account within divorce proceedings? If the business is taken into account, how is it to be valued? Is my wife or husband entitled to half of my business? Will I be forced to sell the business or any of its assets? Will the court force me to transfer shares in my business to my wife or husband? 3

4 Family, Personal & Financial Solicitors IS THE BUSINESS TREATED AS AN ASSET OF THE MARRIAGE? It depends upon the individual circumstances of each marriage, but in most cases the value of a business will be taken into account along with the value of the family home, savings, pension provision etc. The value of a business can be extremely important, particularly after a long marriage and where it is of significant value. In such circumstances, a detailed consideration of the business will be central to the divorce process. By contrast, if one spouse has owned a business for many years, but the marriage has only lasted for a short period of time, the value of the business may be of little importance. In such circumstances, a spouse s claims upon divorce are more likely to be determined by reference to their needs as opposed to the value of business assets. Where the relevance of a business valuation is disputed in divorce proceedings, it is ultimately a matter for a judge to decide whether valuation evidence is to be allowed or not.

5 HOW IS A BUSINESS VALUED ON DIVORCE? The most common approach is for a forensic accountant to be appointed by solicitors to value the business. Usually one accountant is instructed on behalf of both the husband and the wife. The method used to value the business depends upon the nature of the business itself, although the following are the most common: Valuation based on earnings - this is the most common method used in the valuation of private trading companies and is based upon the company s ongoing post-tax profits Asset/break-up value - ordinarily utilised where a company is reaching the end of its business cycle and where there is little prospect of future profits. Net asset valuations are often used for property investment companies Valuation based on dividend yield - appropriate where it is necessary to value a small minority holding in a company where the shareholder has little influence Hybrid approach - this method is applicable where the earnings basis is used but consideration must also be given to whether the business has retained assets that are surplus to its working capital requirement. 5

6 Family, Personal & Financial Solicitors OTHER ISSUES TO BE ADDRESSED IN VALUATIONS Many people believe that accountants are simply instructed to provide an opinion of the value of a business. Although such information is important within divorce proceedings, it can also often be important to look at the following: Issues of liquidity - the court may wish to consider whether one spouse can draw significant sums from the business to meet a financial settlement on divorce. If money cannot be withdrawn immediately, it may be necessary to consider how money can be drawn over a period of time Tax issues - money withdrawn from the business can be subject to payments of tax. An accountant can advise on tax effective methods to extract cash from a business Forensic investigation - in some divorces there may be concern that one spouse is hiding money through the business or through a group of companies. In those cases an expert accountant will need to be instructed to thoroughly investigate that spouse s business affairs. IS MY SPOUSE ENTITLED TO HALF OF MY BUSINESS? It is extremely unlikely that your wife or husband will be given a direct interest in your business. The more common approach is that if you are to retain your business, then your spouse may be given other assets to compensate them. By way of example, if you were to keep your business, your wife or husband may be more likely to keep the family home.

7 WILL THE COURT FORCE A SALE OF THE BUSINESS? It is exceedingly rare that a court will order a business to be sold. A family business is usually the main source of financial support for the family and it will need to be preserved wherever possible. Family courts will always seek to achieve a financial settlement which is fair to both the husband and the wife. If the family business is to be preserved, then the other spouse needs to be provided with sufficient capital and/or maintenance to address that imbalance. We have extensive experience of negotiating divorce settlements involving family businesses and can ensure that the business is protected and all relevant financial and tax issues are properly addressed. It would be highly unusual for shares in a business solely owned by one spouse to be transferred to the other spouse upon divorce. By contrast, where both a husband and wife hold shares in a company together, the likely outcome is that only one of them will retain the business in the future. The other will, however, be adequately compensated by way of a lump sum and/or maintenance payments. SPECIALIST ADVICE Many family solicitors have limited experience of dealing with divorces involving family businesses. Whether you are seeking to protect your shares in a business or your spouse has a business which requires a thorough investigation, it is essential that appropriate and realistic advice is obtained at the outset of your relationship breakdown. Our extensive experience of business affairs within divorce proceedings will provide an invaluable resource. 7

8 CONTACT US For further information on the issues covered in this booklet, or to see how we could help you, please contact Andrew Newbury on or Pannone part of Slater & Gordon have offices nationwide. To find your local office visit Slater & Gordon (UK) LLP is authorised and regulated by the Solicitors Regulation Authority. 1