Running your own business can be the fulfilment of a lifelong dream, but it also brings stresses and strains which sometimes contribute to relationship breakdown. It certainly adds complexity when trying to agree a financial settlement in divorce proceedings.
‘The key challenge is to achieve a fair settlement without jeopardising the long-term financial health of the business upon which both people may still need to rely,’ says Fiona Yellowlees, a Partner and Head of the Family Law team with WBW Solicitors. Determining a valuation for any business takes skill and tends to be a more complex exercise than valuing other matrimonial assets such as the house or a pension.
Obtaining a business valuation
Like all other matrimonial assets, it is likely to be necessary to obtain a valuation of the family business or private company. In order to achieve a fair settlement, it will be necessary to understand what the company or business is worth and what income it generates.
It is usual for an independent valuer, often an accountant, to be appointed in order that a true and fair assessment of the business can be made. They will need access to information and business accounts, and this is usually provided by way of ‘disclosure’ when information is provided by the spouse(s) involved in the business.
If any gaps in this information are suspected, the valuer will request that further information is provided in order that they can provide an accurate valuation.
Reviewing a prenuptial agreement
Aware of the risks to a family business, founders sometimes encourage or even insist that younger members enter a pre-marital agreement when they get married to protect established business assets in the event the marriage fails.
If you have a pre-marital agreement, the first step will be to look at this and see what was agreed. It is not uncommon for the capital value of a spouse’s interest in a business to be the subject of a such an agreement, meaning it is intended that the resource is ring fenced from the assets to be divided. Sometimes the interest in the business is limited in a certain way, for example, only taking into account certain business assets or ventures in order to protect other family members and generations.
It is also possible for couples to have entered a postnuptial agreement after marriage, which may impact the business division in the same fashion as a prenuptial agreement can.
Appointing a joint valuer
This is usual and involves the valuer being instructed by you and your spouse together; and paid by you both equally. The resulting report provides a single expert opinion for you both. This is the process which the Court would adopt if a valuation is required. We can advise you if this is appropriate in your individual circumstances.
Factors affecting the valuation
The valuation will depend on a number of factors, including the following:
- Business structure – it is essential to understand its ownership structure – whether sole trader, a partnership or LLP, a limited company with one or more shareholders. The presence of, and implications for, partners or shareholders will be taken into account.
- Employment – if one spouse is an employee of the business, rather than an owner, it may also be necessary to obtain employment law advice. This will depend on the intended settlement of the business asset and whether they are likely to remain involved with the business.
- Business assets – a service may have few fixed assets compared to an investment business with a portfolio of bricks and mortar or a manufacturing business with plant and machinery. Invisible assets also need to be considered – such as goodwill and intellectual property (patents, trade marks, designs or copyright).
- Trading pattern – an analysis of historic trading profits and predicted future income will be essential. Subscription businesses such as software-as-a-service may benefit from a predictable income stream, while other businesses may be seasonal or subject to fashion or significant market fluctuations.
It is important to appoint a valuer who has extensive experience in your type of business in order to obtain an accurate valuation.
Disputing a valuation
It is not uncommon for a business valuation to be disputed during a divorce. For example, the spouse not involved in the business may be sceptical about a low business valuation if the couple previously enjoyed a high standard of living. The owner of a business may seek to downplay its value, this can be done in a number of ways, such as delaying progress on trade deals or applying for patents to increase business value. In some cases, business owners have even sought to hide business assets in offshore accounts or under complex trusts to give the impression the business is not doing as well as it is.
If you dispute the business valuation of your spouse or you do not feel they have been upfront about the true nature of the assets or income of the business, then it may be necessary to obtain an order from the court for disclosure of specific information.
We are experienced in scrutinising business accounts and company structures and can advise if separate or specialist advice is required as well as whether an application to the court will be necessary.
What happens next
It may be that the business interest can be set off against other assets such as a pension in order that one spouse can still continue with the business unaffected. If that is not possible the court may consider structured payments linked to profits as an alternative option.
The courts will be careful to allow a business to continue as a going concern, and this sometimes means that creative options will be looked at to enable a fair settlement to still be achieved.
If the business is a family run home-based business where children of the family are involved, then they may also have rights to be considered.
How we can help
Obtaining early expert advice is important in order that an accurate valuation can be obtained, and a fair settlement agreed for both spouses.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.