Coming to a reasonable financial agreement when divorcing is often difficult enough, but when adding in the extra level of complexity that comes from dividing a successful shared business it can become even harder. The following guide will help you understand the process involved in reaching a mutual agreement when divorcing a spouse when one or both of you are part of a family business.
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Is my spouse entitled to half the family business on divorce?
In theory, yes. All assets are considered by the court when determining a financial settlement during divorce. This includes any stake in a business, the value of which will be calculated along with other financial assets when determining any final award.
However, it is important to note that when the spouses’ solicitors are negotiating the division of their clients’ assets, they will be guided by what the court would do if the case went to court. Typically, the court tries to keep the family business with the business owner if there are sufficient additional assets in the marriage that can be awarded to the other spouse (such as savings, investments, house etc).
This is also often the preference of both spouses – the business owner doesn’t want to divide their company, nor does their spouse want to have a stake in a business with which they have no desire to be involved.
Many couples never set foot in court because their solicitors will have advised them on the court’s likely decision in order to help them come to an amicable out-of-court agreement.
My spouse never worked towards the business – is it still considered a marital asset?
Yes. It doesn’t matter if your spouse is the ‘homemaker’, if they are employed in their own job, or even if they have a business of their own – the business will be considered a marital asset if either spouse owns a share in it.
That said, it is very unlikely that the court would award part of a business to a spouse who has never been involved with its running. Adding an inexperienced shareholder could be damaging to the business – even more so if the divorced couple are forced into a bitter business partnership.
Unless the couple are amicable and are both willing to share the business, the court would try to find another way to divide the marital assets so both parties receive a fair share while providing a clean break from each other.
What counts as a family business?
A company is considered a family business if the majority of votes in the firm are owned by the people who first established the business, or that they are in the possession of their spouses, parents, children or heirs.
In short, this means any company where a family member has a say in the running of the business, its finances or administration is considered a family business. Of course, what matters with regards to divorce is whether either spouse has a share in the business. If it is a family business but is wholly owned by the spouse’s parents or siblings, then the business has no relevance to the marriage and would not be considered an asset to be divided in divorce.
Does my self-employed work constitute a family business?
Technically speaking, yes. If you are the majority shareholder of your business (or sole trader in the case of many self-employed businesses), then it falls under the umbrella of a family business.
Even if you have been self-employed from a time before you met your spouse, they will potentially be entitled to a share of your business as it will have become a family asset.
In many cases, self-employed people simply gain an income from their work and do not have businesses with significant assets. In these cases, common sense would allow the self-employed spouse to continue as they are without dividing their business and instead pay an agreed monthly sum in spousal maintenance (if required) which would be derived from their self-employed income.
What should I look out for when assessing a family business?
There are many factors to take into account when assessing a business, including (but not limited to):
- What is the income brought in from the business?
- Does the business appear to provide a high standard of living (irrespective of the formal income or dividends it pays out)?
- Does the business own property or other assets – do they have loans against them or do they have equity?
- Is there a company pension? How is it organised?
- Are there other shareholders with a different interest who must be considered?
Should the family business use its internal accountant to value the business?
When valuing a business, it is more typical for a specialist independent accountant to provide an independent valuation rather than the company’s own accountant. While the business’ own accountant can be available for consultation, it is generally not recommended that they are used to provide a valuation. The process of assessing a business in divorce is specialised, and any valuation offered by an accountant that could be considered to have bias is likely to be challenged by the spouse’s solicitor.
Note that the costs of a court-appointed accountant will be shared between both parties to the divorce and could cost in the tens of thousands depending on the size and complexity of the business. If the business has property or other assets, these may then require valuing by additional independent experts which will raise the costs further.
If you are the one making a claim for a share of the business as part of your financial settlement, you may wish to employ your own accountant to look over the reports and satisfy you that the figures within are accurate or if there are any gaps.
Does every business require valuing in divorce?
No. Many small businesses that simply provide the business owner with a wage and have little-to-no assets, do not need to be valued. After all, the business has nothing to sell and little-to-nothing that can be divided. In these cases, the business owner will pay a maintenance payment from their income, and/or other martial assets (such as the house, pensions and savings) will be divided so the overall financial settlement is fair for both parties.
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The business will struggle to survive if assets are removed. Can I prevent that from happening?
It is usually in both parties’ interests to make sure no damage is done to the business. It is very unusual, for example, that a court would order a business to be sold and its assets stripped as part of the divorce proceedings.
In general, the court will work with the full intention of leaving the business intact. If the business is a limited company and the assets are owned in that company name, it would only be in very rare extreme circumstances that a court order the sale of assets.
If the business isn’t able to immediately liquidate assets to reach the desired financial settlement, the courts will look towards spousal maintenance as an ongoing way to reach a fair outcome.
The business has been in my family for generations before I met my spouse. Do I have more of a claim on it?
When considered on its own, the history of the business and its growth are not factors that largely affect the decisions regarding the financial settlement of the divorce. As with any assets, shares of a business become part of the family upon marriage and are divided fairly upon the divorce.
However, if you have only been married a short time and you have no children together, the court would be very unlikely to split the business – favouring instead a settlement that placed you in a similar financial position you both held before marrying. If you have been married for a longer period but your spouse has had little or no involvement in the business, the courts would also be very unlikely to award them a percentage stake.
If the court felt that dividing the business could cause damage to the company or to other shareholders, it would also be unlikely to split the business or ask for assets to be sold. In these situations, your spouse would be more likely to gain an agreed maintenance payment from your income or a share of other martial assets, such as the home or personal savings.
Additionally, should anyone else outside of the marriage have shares in the business, these will not become part of any financial settlement – only the stakes of the two spouses in question are relevant.
I no longer work for the business but continue to be a shareholder, is my spouse entitled to my shares?
Yes. Any shares you have in a business, whether or not you work there, are part of the family assets and will be considered by the court as such.
Will I have to provide spousal maintenance from the family business?
In situations where there is insufficient liquidity in the business to provide a lump sum as part of the main financial settlement, the court may opt to allocate spousal maintenance payments as an ongoing way of giving an adequate share of the business value.
Can I protect the family business from the divorce?
If you have already reached the stage of being married and moving towards a divorce, then there is little you can do to retroactively separate your business from your family assets. You can propose to your spouse that you both enter into a post-nuptial agreement, although if there is any tension between you, this is unlikely to result in an amicable arrangement and could be contested as part of any final divorce process if, for example, the spouse can demonstrate that they were pressured into the agreement.
Prior to marriage, you can opt for a pre-nuptial agreement which can – if drafted correctly and entered into freely – dictate how assets would be divided upon divorce. It should be noted that in England and Wales the court is not obliged to follow the terms of any pre-nuptial agreement, although they often do.
It may be that a pre-existing shareholders agreement you have as a shareholder protects in some way from your shares being transferred to your spouse. Legal advice is recommended in these instances.
Can the business dealings be settled out of court?
Yes. In many cases, the couple will not need to go to court. Instead, the marital assets (including the business) can be looked at as a whole by both parties’ solicitors and a fair division of those assets agreed upon. In less common cases – especially where the business has significant value or where both spouses are involved in the business – proceedings will require the court’s involvement to end any deadlock in negotiations.
Do you need help with your divorce?
Get in touch now with one of our panel of specialist local family solicitors.
The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.
