Divorce and company ownership: will I be forced to sell my business?
The number of divorces in the UK has been at a record high in recent years and it is estimated that as many as 4 out of 10 marriages will eventually fall apart.
The end of a marriage can be one of the hardest and most emotionally exhausting things that can happen to us in our lives. However, for business owners it can provide additional headaches and worries, not only about the end of our marriages but also the future of our businesses.
In this article we will look at what happens during the process of divorce and some of the ways that you can limit the damage that divorce can have on your business.
After years spent developing and working on your business, it can be a terrifying thought to have your business assets included in a financial split. Because of this you may be tempted to hide the fruits of your labour by moving or selling assets and transferring money to friends or off shore accounts, but it’s not a wise move. As part of the divorce process, you will need to disclose financial information and this includes business assets. Accountants and even forensic specialists can be involved and if there is any whiff of deceit then you could cause problems for yourself, damaging your credibility in court.
An example of this is if you sell assets to a friend on the basis that they will transfer them back to you at a later date. The court has the power to set aside these transactions and transfer them back into your name so that they can still be taken into account when it comes to a final financial split. Furthermore you will damage your credibility with the court, which despite what you may think are looking for the fairest possible split and do not want to see your business fail. Attempting to hide your assets may only cause them to pick through your finances with a finer comb in the future.
Both parties are encouraged to make a full disclosure of financial assets. You will be asked to complete a ‘Form E’ which is a very specific summary of your financial situation. This form provides details of all of your finances as well as the needs of both you and your children and you will be asked to evidence it with 12 months of bank statements. You will need to list details of anything of financial relevance, which commonly includes things like property, assets, bank accounts, investments, shares, credit cards, pensions, endowments, earnings from employment or self-employment and any business accounts and interests.
Valuing your business
A good solicitor will aim to seek the best financial settlement on your behalf. If you own a business then the court will seek to discover how much income the company could generate and what it is worth. If you and your spouse cannot agree on a settlement figure then the court may ask an independent accountant to provide a valuation of the company.
The most common method of valuing a business is with an earnings based method. Here, an accountant will assess the value of your business by predicting your future earnings. They will look at the profit of your company and multiply that figure by benchmarking it against similar private companies.
In some scenarios it may be difficult to pin down profits as there may be an ongoing circle of re-investing profits such as through buying property. In this case an accountant may decide to assess the value of your business on the assets that it owns and what income they would generate if sold.
An accountant might also decide to value your business through a dividend based valuation. Here they will value your company by predicting future dividends of the company.
Finally a discounted cash flow based valuation method might be used. This takes a view of the expected cash flow into the company in the future and then applies a discount rate. It is used when the anticipated cash flow of a business can be predicted with some degree of certainty.
When determining the value of a business it is important to consider whether the business actually has any asset value. For example, a plumber may run a business but as a sole trader take an income from the work that he undertakes. Therefore, it is unlikely that the plumber’s business has any sale value. The type of company structure that the business operates under (sole trader, partnership or limited company) can indeed have a significant impact on valuation.
Once a company has been valued and a split decided, how are funds released? Will the business have to be sold? While in the past the courts often took the attitude that you don’t “kill the goose that lays the golden egg”, it’s not always so straightforward. In a case in 2001, the judge was stated as saying: “Those taboos against selling the goose that lays the golden egg have been laid to rest. Nowadays, the goose may well have to go to market for sale”. However, this doesn’t necessarily mean that you will have to sell your business; the court will only press for a sale or partial sale if there are no other practical alternatives available.
What alternatives are there to selling your business?
Restructuring your business doesn’t always mean that you have to sell your company. You could raise the funds to meet the valuation in other ways, such as:
- Raising funds from cash in the business
- Raising funds from selling off company assets such as property or vehicles
- Transferring non-business assets to your spouse to offset their claim of the business value
- A payment in instalments
- Agreement to pay spouse a percentage of the value of the sale of the business in the future
Every business is different and the role of company ownership during a divorce can be very complex which is why it is essential to seek advice from experienced family law professionals at an early stage.
If you are planning on getting married and would like to investigate all the possible avenues of protecting your business in the future then we can help. To arrange an initial consultation with a solicitor experienced in family law issues, please contact us or call us on 0207 7611 4848.