How are businesses treated by the courts on divorce?

Generally, businesses and their value are included within the assets to be shared within the divorce settlement, even if one spouse has never been involved in the businesses. This is because all assets and interests are, in principle, capable of being shared – and businesses are no different.

In many cases, it will be necessary to instruct a forensic accountant to prepare a valuation of the businessand the cost of these reports are typically borne equally in the first instance. Additionally, single joint experts can usually be asked to opine on factors such as liquidity, sustainable income and the tax implications on disposal of the parties’ interest(s) in every relevant business.

The business valuation method may be:

• Net Asset Valuation: The underlying value of the business is the assets it holds e.g. property and stock.
• Earnings Based Valuation: The profit that the business is expected to make in the future and the level of earnings that are maintainable by the business.

The value may also depend on the structure of the business – whether it is a limited company, sole trader or partnership.

Upon receipt of the report, the parties have the opportunity to ask questions of the expert and, if necessary, could question their valuation methods for the business. In circumstances where there are a variety of ways to value a business, there is the potential for disagreement as to the most appropriate method depending on the nature of the business itself. The use of an unsuitable valuation method can potentially impact the resulting value of the business in a significant manner, and it is therefore important to challenge any valuation method which may be inappropriate at this stage.

Once the valuation process is complete, the way that the value is ultimately divided is dependent on several factors.

What if other people own and run the business with me?

Courts usually prefer to leave business structures unaffected (i.e. not make an order for sale), prioritising their ongoing viability. This is good news for business owners who are getting a divorce and the people who run the business with them. However, this might necessitate finding alternative assets to satisfy your spouse’s financial entitlement.

What if I started my business prior to the marriage?

The genesis of a business is an important consideration. The court considers whether it was founded during the marriage or brought into the marriage by one of the parties. If the business was founded prior to the marriage, the court will look at the extent to which it has grown during the course of the marriage in deciding what proportion of the value of the business could be said to be ‘matrimonial’ and therefore available for division. Generally, ongoing businesses that were acquired prior to the marriage mean that your spouse will be entitled to an interest of some sort, because the business has continued during the marriage.

At the opposite end, it may be possible to run an argument that the value of a business should not be shared equally where the business has grown post-separation, but only in limited circumstances (for example, where the growth has not purely been passive but a result of active effort).

My spouse and I are co-owners of the business

When the spouse you are divorcing is also your business partner, you may be facing both the end of your marriage and the loss of a long-standing business dream.

Where desired and achievable, a business will usually be left with the founding party, whilst the value of the other party’s share (if any) is offset by other assets available, such as cash or property. Wherever possible, a court will want to avoid the parties remaining as co-directors or shareholders in a business following a divorce.

Whilst the court does have the power to order the sale of a business, it is not a power taken lightly and the court is very careful when considering making such an order.

One party may be able to buy the other out, for example by purchasing their shares, and there are several different ways to do this. Most commonly, one party will make a lump sum payment to the other in exchange for their share of the business. Alternatively, one party may retain ownership and make regular maintenance payments to their spouse/former business partner. Or the court may make a Wells sharing order, as referred to below.

Will I have to sell my business on divorce?

It is very rare for a business to be sold as part of a divorce. The court has a wide discretion when deciding what settlement award to make upon a divorce and will try to keep a business with its owners where it can.

However, it is important to note that the nature of business assets may mean that it will prove very difficult to achieve a clean break. Business assets such as shares in a private

company or an interest in a partnership are highly illiquid. Therefore, if a significant part of the matrimonial asset pot is made up of the business interests, its illiquidity could make it difficult to achieve a clean break settlement because the court may order periodical payments to allow the financial weaker party to benefit from the profits of the company where the other spouse is not able to pay lump sums.

Wells v Wells [2002]

Wells v Wells [2002] grappled with the issue of how the family courts approach each spouses’ interest in the business.

In this case, the husband’s business (which the wife also had a small percentage shareholding in) was in difficulty such that there was no realistic prospect of sale, making valuation impossible. The original judgment had awarded the entire proceeds of sale of the FMHto the wife and left the husband with the business plus some other limited assets.

The Court of Appeal overturned this decision, holding that there must be ‘a fair division of both the copper-bottomed assets and the illiquid risk-laden assets.’ Lord Justice Thorpe stated that had the marriage survived, the family would have undoubtedly shared adversity as it had shared prosperity. As a result, the husband was given a greater share of the ‘copper-bottomed’ assets, as a reflection of the business’s vulnerability. The wife retained her shareholding in the business (such that both parties retained shares in the company, known as Wells sharing) and the Court of Appeal deferred absolute finality by introducing a mechanism enabling the wife to apply in the event of a sale of the husband’s shareholding within five years from the date of the order.

This case outlined that courts recognise businesses being risky assets, potentially resulting in both parties having to retain shares in the company or, alternatively, the value of the business being discounted or the party keeping the business having a greater share of other assets.

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