For business owners, divorce can bring an added layer of uncertainty to what’s already a challenging situation. Beyond concerns about family, finances and future plans, entrepreneurs can also find themselves thinking about what will happen to the company they’ve devoted years to build.
You might find yourself asking questions like:

– Could a spouse be entitled to part of the business as part of the divorce?
– Will operations be disrupted due to my personal life?
– How are businesses valued during divorce proceedings?

There are a lot of misconceptions surrounding how business assets can be split during a divorce, so to put the record straight Joshua Coombe, Partner of Family Law at Tees Law, explores some of the most commonly asked questions surrounding how business assets are handled during a divorce.

Family Lawyer Answers: Commonly Asked Questions about Business in Divorce

How Different Businesses are Handled During Divorce
The most commonly asked question put to divorce lawyers is ‘how will my business be affected during a divorce’. There’s no one size fits all answer to that question, as it’ll depend on a number of factors, such as the type of business you own.

The overriding objective is to achieve a clean break between the parties at the earliest opportunity. Generally, a business which is operated by one or both of the parties will be the main source of income/wealth for the family, so it is hard to sell or realise the parties’ interests in it, without impacting on their finances going forward.

Each case is different and the needs of the parties must be assessed on the facts to achieve a level of separation, which does not leave them in a financial position which materially changes their ability to provide for their needs.

Below is a more detailed look at various types of business, and how it’s handled during a divorce:

1. A company used solely as a vehicle to manage income (freelancer/self-employed)
These companies are usually managed by a single shareholder/director as a way of receiving their income and reducing their tax liability by paying a basic level of salary and the rest by way of dividends (i.e small sole traders, contractors). The income stream attached to this business is usually inextricably linked to the to the individual running the business.

What The Parties & Court Wants to Achieve
Generally, there is no value to such a business, so a sale is a waste of time. Instead, as the business generates an income stream it is better left intact, and the financially weaker party receives a share of the income by way of a regular maintenance payment.

2. A company used to hold family wealth (usually a property portfolio)
These companies are usually managed by both parties to the marriage as shareholders/directors, sometimes with their children also having shares.

The main asset is the property portfolio, which can be valued by a surveyor, although tax advice will be required for the purposes of ascertaining the best approach to sharing the property.

What the parties/Court wants to achieve
These businesses are often the most problematic, as the parties may want to remain in business together, even though they can no longer communicate with each other.

Judges generally prefer to find a way to share the property assets, either by selling them and sharing the profits, or dividing up the properties and enabling the parties to continue to manage them either through separate corporate structures or in their own names.

3. A corporate start-up/going concern (startup founder/SME owner)
These companies have usually been set up off the back of a good idea, specific knowledge or experience of one of the parties, usually during the marriage, and has been successful. In most instances, both parties will be shareholders/directors of the business, or if not, the main party will be the shareholder/director and the other will be an employee.

What the parties/Court wants to achieve
In most circumstances, this type of business can be valued, with consideration given to the stock or goodwill, and an assessment made as to a future income stream and liquidity.

One party will be the main driving force behind the business and unless the business is to be sold, it would be unusual to take the business out of their control. It would equally be unusual to add the other party as a shareholder to a business of which they have limited knowledge or involvement.

The question is often whether there is a way of buy out the other party’s matrimonial interest, or they have to wait for a future sale. Clearly if the business if projecting future growth the main shareholder/director will want to achieve a settlement which ends the other party’s claims against the business.

4. A partnership run as a corporate entity
Quite often businesses between friends and/or family, although set up as a corporate entity, are actually run as a form of partnership, whereby decisions are made collectively with no one director/shareholder having sole control or the majority of the vote. This type of collective thinking will determine the direction of the business but also mean the shares of anyone party are unlikely to be saleable to someone from outside of the business owners.

A valuation of such a company will quite often come with a discount, recognising the quasi-partnership nature of the structure and the limitations on a future sale unless all business partners were in agreement.

What the parties/Court wants to achieve

The party who is the director/shareholder is usually reluctant to relinquish control of their share of the company. Generally, there is limited ability to realise the interest in the business, without trying to force all the shareholders to sell, which is highly unlikely.

5. A large multi-national corporate entity

As most large multi-national companies are listed on the stock exchange, the value of the shares can usually be determined. The main issues are generally around the vesting of any shares, which may have been awarded as a performance incentive and require ongoing employment over a period of time.

What the parties/Court wants to achieve

These shares are saleable and are likely to be realised for the purposes of funding a financial settlement.

Sometimes the shares have a prospective value that makes them an attractive asset to retain, but this would not be to the disadvantage of a financial settlement.

Does a spouse automatically get half of your business or shareholding if you divorce?
No, unless the business falls into category 2 above where the sole purpose is to hold capital assets in a tax efficient fashion which can be divided between the parties in a way which might reflect an equalisation of value.

In most cases, it is not usually possible or desirable to share a business equally either as to value or shareholding. The reasons for this can include:

The Sharing of Value
This would imply that half the asserted value of the business needs to be realised to be shared. In most cases, it would financially cripple a business to try and liquidate assets or raise finance to pay out a lump sum representing half of the value. Even though a business valuation will usually be obtained, one of the most important issues to ascertain is the liquidity available in the business which can be used to support a financial settlement, without damaging its ability to continue trading.

The Sharing of Shares
This is also unlikely, as in most cases this could mean the shares are likely to be distributed to someone who has not previously had an active role in the business. Even if both parties have had a prior involvement, unless they are entirely amicable, there would be significant risks to them being given an equal shareholding. This can create risks for both the business and the shareholder through:

• Impacting on decision making or control,
• Create a difficult working environment,
• Affect the confidence of financial partners or investors,
• Result in a loss of staff/employees

Are business assets dealt with differently in mediation vs litigation divorces?

The benefit of negotiating an outcome by way of mediation, is it gives the parties the ability to decide what is in their own best interests, which can include the structure of the deal as it relates to the business.

Rather than delegating this decision to a Judge who is more likely to look at the best way of trying to achieve a clean break, the parties have more control over how they manage the future of the business or their involvement in it. In my experience this can lead to more pragmatic solutions, which are likely to work as the parties have created them, rather than a Judge imposing a solution which might not reflect the parties’ particular business skills or future needs.

What happens if both people involved in the divorce own the business?

It is not uncommon for a couple to be involved in a family business, either as a shareholder or an employee, or both. However, it is unusual for both parties to be the main driving force behind the business and therefore able to take the business forward. In these circumstances, one party is usually willing to relinquish their shareholding/directorship, provided they are appropriately sharing in a division of the other assets by way of a financial settlement.

Is there any way you can protect your business retrospectively from divorce?

If the business is a matrimonial asset (because it was set up during the marriage or matrimonialised over the course of the marriage), then there is nothing one party to a marriage can do to protect it retrospectively.

As a matrimonial solicitor, I have been confronted by numerous business owners who believe that holding a business in a trust or setting up certain restrictions on the future ownership of the shares, could impact on the Court’s ability to consider them a matrimonial asset. This is not the case, as the family Court has extensive ability to look at reality of the situation and how the business was treated during the course of the marriage, to determine how it should be taken into account.

If as a couple, the parties were willing to agree to remove the business from a future sharing of their matrimonial assets in the event of a divorce, then they could consider entering into a Post-Nuptial Agreement. However, in my experience most Post-Nuptial Agreement fail to progress due to the fact one party is reluctant to give up the rights they have acquired by reason of marriage.