In a 2012 study 71% of SMEs described themselves as ‘family businesses’. It’s therefore not uncommon for a divorcing couple to have shared business interests. Whether this is a traditional family business or a shareholding in a PLC, both parties are likely to have significant concerns about what happens to the business.
There are various factors and potential complications that need to be taken into consideration. Often one or both of the parties will be employed by the business. Even if only one of the parties is employed by the business, it is common for both parties to be owners or shareholders as in some situations this can bring with it various tax advantages. The treatment of business interests in a divorce settlement will typically therefore have an impact on the income and employment prospects of the parties.
In this article we’ll give a brief overview of how businesses are typically treated in divorce proceedings by addressing 3 frequently arising questions.
What Happens to a Business in a Divorce?
1. Will the business need to be valued?
The Court will often want to ensure that the parties’ interests in the business are clarified and that a valuation exists. They will then want to determine how that value should be taken into account as part of the financial settlement. It will often be necessary to have the business valued by appointing a single joint expert.
Once the valuation has been obtained it may be necessary to consider the impact of tax in order to calculate the net interest that the parties hold in the business. Entrepreneur’s Relief is often available and can reduce the amount of CGT payable. Accountancy advice might be sought to quantify any CGT liability and establish how, when and by whom it should be paid.
2. Can the Court order that the business be sold?
The Matrimonial Causes Act 1973 gives the Courts the power to order the transfer of shares held in a limited company. In other words, where one spouse has a shareholding in a business he or she can be ordered to transfer these to their spouse by way of financial settlement.
The Courts do have the power to order the sale of shares held in a private limited company. In practice this is very rare, particularly where the company is a family business that will continue to be a source of income for one or both of the parties.
3. Can you run the business together after the divorce?
As a general rule, the Courts are reluctant to impose a settlement upon the parties whereby they both remain in the business upon divorce.
However, there are two primary reasons why this may be necessary.
The first is that both parties want to remain actively involved in the business. This might be because they remain amicable and wish to consider working together – perhaps because the business has been lucrative or because there is the possibility of an imminent sale.
The second scenario is where the business is valuable but relatively illiquid. If there are insufficient assets for one party to buy out the other’s interest – typically because it isn’t possible to extract enough cash from the business to fund a lump sum – the preference of the Court is for the risk to be shared equally by the parties.
Where the parties remain shareholders of a company as part of a divorce settlement it is often necessary to have a shareholders’ agreement drawn up. This will govern the conduct of the parties and seek to prevent the value of the business falling due to the misconduct or uncooperative behaviour of one party.
In reality if there is any uncertainty about the feasibility of continuing to work together other options might first be explored with the advising solicitors.
There is not a standard formula that can be used to establish what happens to a business in a divorce. Whilst it is common for one party to retain the business, the Courts will inevitably take a pragmatic approach and consider the best interests of both parties.
Instructing an experienced matrimonial lawyer and speaking to your accountant at an early stage will help you to identify the best approach for you and your business.