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The treatment of a business upon financial settlement following divorce

Essential reading if you are contemplating divorce and own an interest in a business, or are married to somebody who has. The article explains how the law will treat the business during the divorce process.

Divorce and my business
Commonly asked questions by a business owner about to go through the divorce process:

a) Will I lose my business?
b) Will I have to transfer some of my shares to my spouse?
c) Will there be a valuation of the business and if so does the Court take into account issues in liquidity and tax when considering any payment of a lump sum to represent a share of the value of the business?
d) What if I have third party shareholders?
e) Will I be given time to pay?
f) What if it is a third generation business started by my grandfather/grandmother or father/mother, is that relevant?

All of those questions are important and relevant issues which you would expect anyone owning and running a business to be concerned about.

The first thing to understand is the Courts are not looking to close or ruin businesses.

A business is an asset and the value of it will be taken into account but so too will a number of factors because of course a business is an unusual form of asset in that it is not liquid and in trying to get money out of the business, there are huge potential tax implications.

To deal with some of the questions above therefore:


a) Will I lose my business?
It is highly unlikely that a business will be lost as a result of the divorce process.

b) Will I have to transfer some of my shares to my spouse?
It is uncommon for the Court to Order a transfer of shares from one spouse to another. The whole point of a divorce is to separate the parties out both on a personal and financial level.

c) Will there be a valuation of the business and if so does the Court take into account issues in liquidity and tax when considering any payment of a lump sum to represent a share of the value of the business?
It is usually the case that a business will have to be valued by a single expert whose identity is agreed between the parties and approved by the Court. The costs of that valuation are usually shared between the parties. The valuation of the business can cost anything between £5,000 – £20,000 depending upon its size and complexity.

Issues:
Any such valuation is obviously academic and a paper exercise in the absence of a genuine purchaser making an offer and therefore to some extent is treated with a degree of caution by the parties' lawyers and by the Courts.

When valuing the business, the issues of taxation and liquidity have to be taken into account.

d) What if I have third party shareholders?
The fact that there may be third party shareholders and that the spouse involved in the business may not have a controlling share and may often have a minority interest, all of these issues impact upon valuation.

Shareholder agreements with third party shareholders also have to be carefully scrutinised to understand what can and cannot be done.

e) Will I be given time to pay?
If it is determined that a payment should be made from one spouse to another to reflect an interest in the value of a business which has been run during the course of a marriage, then time will often be given for such payment to be made so as not to cause unnecessary difficulties for the ongoing running of the business.

f) What if it is a third generation business started by my grandfather/grandmother or father/mother, is that relevant?
It is also extremely relevant to look at when a business was founded. The Court will give credit and recognise where a business is a second or third generation business founded by their parents or grandparents prior to the husband and wife who are divorcing actually coming together.

Contact us
If you would like to discuss any aspect of divorce please contact our Family Law team.  Our Family Law team are experts at managing complex divorce cases for clients. 

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

David Pickering

Partner - National Head of Family

I am National Head of the Family Team and am rated as a leader in my field for the provision of expert family law advice.

Elspeth Kinder

Partner

I am an expert in a broad range of family law and divorce matters, including financial settlement on divorce, pre and post-nuptial agreements, cohabitation agreements, and separated parent matters relating to appropriate arrangements for children.

Gareth Curtis

Director

I am a Director in the family team, based in Manchester. I represent clients across the UK and internationally, including Australia and the Far East.

Beverley Jones

Partner - Head of Family Department (Liverpool)

Heading the family team in Liverpool, I am a family and matrimonial expert who deals with all aspects of family law.