Can you protect your business when faced with divorce?

A business can come under much scrutiny in a divorce: How much is it worth? How much income can it produce? Is there any liquidity in the business, so that capital can be extracted from it?

The first thing that a court will want to establish is the value of the business.  In some cases it is obvious what the business is worth simply by looking at the accounts, but in other cases it will be necessary to have expert evidence to establish the up to date present market value.  These are not valuations carried out by the company’s accountants, but by an independent single joint expert appointed by the court.

Judges are aware that valuations of businesses tend to be speculative. An example of this in one case was when a wife successfully appealed a decision of the court, when following the hearing at which the District Judge used a valuation of £730,000 for the shares, other shareholders subsequently offered to buy the same shares for £2.4m – £2.8m (P v. P (financial relief: procedure) [2008] EWHC2953).

Having established the value of a business, a judge next needs to decide how it should be treated in the financial settlement.  Although in the 1990s, the rule was generally considered to be that if the business provided an income for the family and therefore, it made no sense to sell it, Mr Justice Coleridge in the case of N v. N (2001 2FLR 69), stated that “those old taboos against selling the goose that lays the golden egg have largely been laid to rest”.

In practice however, it is still rare for a business to be sold if it provides an income for the family. Other options are often looked at, such as the spouse who is not involved with the business receiving ongoing maintenance from income generated by the business or, as happened in P v. P (referred to above), both parties retaining shares in the business.  This latter option is often unattractive for the spouse who has a day to day involvement in the business because they feel the other spouse will unfairly benefit from their efforts, post-separation.

However, there are ways around this potential dilemma, for example in the case of B v. B [2015] EWHC210 (Fam), the value of the shares was apportioned 60% to the husband and 40% to the wife because the husband’s future endeavours were likely to influence their value.  If one person is going to retain the value of the business in lieu of for example, equity in the family home, the inherent illiquidity (and perhaps the greater risk) of the business investment can also be reflected in the financial settlement.

It is also possible if a business has existed prior to the commencement of the relationship or marriage (such as a family business that has been inherited) for part of its value to be treated as non-matrimonial and therefore, not shared in the same way as the other matrimonial assets.

Divorce is not something one would wish to contemplate whilst happily married. However, it is important to consider the potential implications of a breakdown of a marriage on a business. With the correct planning in place at an early stage, one can take steps to try to protect one’s business (subject to a judge’s discretion to make decisions in respect of the business), such as:

•  A prenuptial or postnuptial agreement can be helpful when trying to protect your business and limit future claims against it.
• Make sure your will mirrors the terms of any prenuptial or postnuptial agreement regarding how your shares or any cash value will be distributed.
• As far as possible, keep your business assets separate from your private wealth.
• Ensure any loans made to the company are properly and formally documented.
• It is important to strike a balance between involving your spouse in the business (to make use of tax reliefs, for example) and involving them to the extent that they can be said to have contributed to its success.
• Consider the ownership structure of the business – if it is jointly owned with other shareholders, it may be less likely that the court will take steps that could negatively impact the other shareholders. Consider also having a Shareholders Agreement in place, which could give the other shareholders pre-emptive rights to purchase your shares, in the event that you were to have to part with your shares in the business for any reason.
• Think about your business early on, before any difficulties arise in your relationship. Avoid making any changes to the company or transferring assets out of it at the time of separation because this may be seen as an attempt to obstruct financial negotiations or prejudice your spouse’s financial claims against you, for which you may be criticised for and which might then be detrimental to your long term position.

For all of the above reasons, it is recommended that when dealing with businesses, you take legal and financial advice early, so that you can explore all of the options available to you. You should ensure that in any financial settlement with your spouse, the potential tax liability on a future sale of the business is taken into account.