DIVORCE AND THE FAMILY BUSINESS

Where you and your spouse are either in business together or where one of you owns or has an interest in a family business the value of the business interest and what will happen to it will be a vital ingredient in any divorce settlement.

Historic treatment

Up until a few years Courts on divorce would largely try to avoid making any final orders which would result in a business having to be sold as by and large the business would be viewed as a source of income. However, that approach has changed significantly in recent years and the Court is far more likely now to make an Order which may result in the need to either restructure the business or in some cases result in a sale of the business, to put into effect the terms of any settlement.

Business structure

The main alternative business structures consist of the following:

The Court’s function

The Court’s primary function in relation to business and business assets is twofold and consists of firstly ascertaining the value of the business or business interest, by reference to expert evidence, and secondly considering how the value of that interest should affect any settlement.

Valuation

Valuation issues will normally be determined by the joint instruction by the parties of a specialist forensic accountant. The accountant may use varying methods of valuation including an earnings basis, dividend basis or asset basis or a combination of these. The precise basis will depend on the performance of the business and its nature. The valuation process is designed to determine the price a purchaser would be willing to offer for the business or the particular interest in it.

Similar considerations apply in valuing a partnership or partnership interest to that of a limited company but the position of other partners who are not a party to the marriage and the terms of any partnership agreement which may exist will also need to be considered. With partnerships as with limited companies the valuation exercise will also look at the question of whether values should be ascribed to goodwill and often this is an area of some debate.

In certain cases the business of a sole trader might not be ascribed a value over and above the earning potential of the person running it, but this is not always the case and where a sole trader is perhaps running several businesses or where a sole trader has other employees or contractors working for them, then the business may be ascribed a value on the basis that a purchaser might be expected to be able to continue it.

How is the value of the business interest treated

The value of the business interest is treated as an asset and will therefore form part of the “pot” when it comes to determining financial provision.

Whether the business itself can be used to assist in raising any settlement will depend on the structure of the business and its liquidity.

If there are significant liquid assets and the business is owned exclusively by the family then it may be possible to fund the settlement or part of the settlement from liquid assets in the business, for example such as bank balances. Detailed consideration would however need to be given as to how the extraction of liquid assets from the company might affect its ability to successfully operate going forward.

The business might own other investments or liquid assets which could be used. Where there are non family member shareholders consideration would need to be given as to how they might be protected with regard to any restructure.

Other possibilities

Other possible ways of the business being used to raise all or part of the settlement might include a company purchasing its own shares, the repayment by the company of any loans to it by family members, commercial borrowing by the company, or the company increasing the remuneration paid to one or more family members, either by way of salary or dividends. The potential sale of shares in the business to an outside third party might be a further possibility.

Summary

On divorce the Court, and therefore the solicitors representing the parties, are more likely now to expect a fairly detailed examination of the nature and any value of any business or business interests owned by either of the parties. The Court is also more likely to make Orders which may have the effect of a restructure of the business in order to fund or part fund any settlement.

Before considering the potential ways that funds may be raised by the business both expert legal and accountancy advice is essential and it is vitally important that the potential tax effect is taken into account.

The Court has recently emphasised heavily the need for family lawyers to take a commercial approach and we greatly benefit from having a team of commercial lawyers who can assist in this regard as well as close links with experts in the field of forensic accounting who can be called upon to assist.