Splitting up the business is often the most difficult and contentious part of a divorcing couple’s assets, especially if the business is a jointly owned enterprise or if one spouse has a high level of involvement in the business. The complexity of the situation arises from the fact that dividing the business involves looking at the matter from multiple angles – legal, financial and emotional. It is important to understand the key factors and to be familiar with the legal framework in order to arrive at a fair and equitable distribution.
The Legal Framework
In the UK, when a couple divorces, their wealth including any business interests will form part of a pot known as ‘marital assets’ which are open to division. The relevant law is the Matrimonial Causes Act 1973, which empowers the court to make financial orders including how assets are split. The principle is that the outcome should be ‘fair’, although this doesn’t always mean equal – 50/50.
In dividing the business, the court is guided by an array of factors. For example:
– The length of the marriage
– The contributions each spouse made to the business (financial or otherwise)
– The needs of both parties and any children involved
– The future earning potential of each spouse
However, UK courts have a lot of discretion, and the outcome of each case is specific to that case. There is no formula or ‘one size fits all’ approach to determining how a business would be split in a divorce. This generally means that, in order to effect a divorce, there needs to be negotiation, legal advice and, sometimes, expert valuation of the business.
Business Ownership Structure
It’s the business structure that’s most pivotal to the outcome of the divorce – is it his, hers, or theirs? Take, for instance:
Sole trader: If the business is in one spouse’s name, then it might still be considered a marital asset but the court could award a much larger share of other assets to the non-owning spouse to prevent disrupting the business.
Partnership: In many cases, the spouses are business partners too, so the question is how to separate ownership without destroying the company. Some couples agree to stay in business together after the divorce, but this can be a recipe for disaster.
Limited company: if the business is incorporated, shareholdings in the company might be distributed or their value set off against other assets.
Valuing the Business
Valuing the business is essential and often requires financial specialists. With the help of an accountant or business valuer, the current and future worth of the business can be determined by reference to profits, assets, liabilities and/or the market. Valuing a business is not always clear cut and can vary depending on external economic conditions. This is just one area that can lead to disagreement between the parties in a divorce.
Options for Division
There are several possible outcomes when splitting up a business in a divorce:
1. One spouse buys out the other: In some cases, one spouse will buy the other’s interest and the company continues to operate as normal. This typically requires an injection of liquidity, often by way of cash, selling other assets or borrowing.
2. Selling the business: Other times, a sale is the only practical solution – for example, if neither spouse can afford to buy out the other, or if both no longer want an interest in the business. Any net sales proceeds would be subject to the settlement terms of the divorce.
3. Keep the business together: While this is not common, some couples agree to stay in business together after divorce, especially if the business is doing particularly well. This can work if the relationship stays civil and both can keep the boundaries between the personal and professional relationships clear.
4. Set off: Instead of dividing the business itself, the court awards other assets (real estate or bank accounts, for example) to one party that is equivalent in value to the business. For instance, the spouse who keeps the business could acquiesce to the other spouse taking a larger share in other marital property.
Practical Considerations
Decisions regarding how to divide up a business in divorce should be considered not only in light of the legal and financial ramifications, but also in terms of what is in the best interests of the business moving forward. A contentious divorce could result in the operations of the company being disrupted, employee morale being affected, or the business itself crumbling.
Communication is paramount. Mutual attempts to keep the divorce as civil as possible, and to avoid the impact of negative divorce factors, will assist in mitigating the impact for the business. Getting appropriate legal and financial advice early on in the process will also assist in protecting the business and personal interests.
To conclude, the division of a commercial enterprise at divorce in the UK is a complex process dependent, to a large degree, on the facts of the marriage, the nature of the business and the intentions of the parties. It can be handled, however, with the right strategy, an eye on equity and a sense of the realities, to achieve a settlement that does justice to the spouses and their business.