The latest figures from the Office for National Statistics reveal 42% of all marriages now end in divorce. With 5.7 million small and medium sized enterprises in the UK in 2017, these figures suggest divorce could impact a significant number of businesses and individuals.
On setting up a small business, often for tax purposes, it is common for spouses to be named as shareholders, company secretary, even co-director, irrespective of the active involvement they will play in the day to day running of the enterprise.
The starting process for a divorce according to the courts
Upon divorce the starting point for asset division is an equal split, which can be adjusted according to various factors such as the needs of the parties and more specifically, the needs of any children of the family. The matrimonial pot will include consideration of the spouse (or spouses) interest in the business.
Will your business be able to continue after divorce?
Generally speaking, the family court will attempt to enable a profitable business to continue, not least as it is likely to be providing an income stream for either (or both) spouse. Usually, the court will also want to extricate the less involved spouse from the running of the business, as clearly if the personal relationship has broken down to necessitate divorce, it is improbable the parties will be able to harmoniously agree on all aspects of business planning and running moving forward.
The usual approach is for the value of the exiting spouse’s interest in the business to be calculated. Some may be able to agree on this, others may require a single joint expert to be appointed. A single joint expert is a specialist who is agreed on, paid and instructed by both parties as opposed to each getting their own expert which would increase cost. This could entail the use of accountants with industry knowledge, forensic accountants, surveyors and/or tax specialists providing expert reports to the court and the spouses.
The experts appointed and their reports will be tailored to the specifics of the business concerned, and may cover issues such as:
- The value of business assets, with deliberation on the effect of realising those assets. E.g. a care home business may struggle if the building it occupies is to be sold. However if the business also owns a yacht, there is potential for sale of this unnecessary item to provide capital.
- Forecasting of maintainable profitability over a future period.
- Identifying anomalies and irregularities in the accounts and trading.
- Undertaking asset tracing, particularly where businesses inter-relate.
- Where the business is stated to be dependent on key people remaining, if this is in dispute, providing an opinion in relation to value the business both with and without the key players.
Offsetting in a divorce
Once the business side has been agreed, it is then usual for attention to turn to the other assets held by the parties, such as the former matrimonial home, investments and savings. The value that the exiting spouse is relinquishing in the business may then be compensated by recourse to other assets, a process known as offsetting. Assuming this approach is satisfactory to both, the exiting spouse can then assign their interest/shares to the remaining spouse and resign from their positions within the business. This is subject to dealing with any provisions in the Articles of Association of the company and any relevant shareholders agreement, particularly where there are shareholders other than the divorcing couple.
Remember – full disclosure is required
Some spouses elect to store money in their capital account upon realising that the marriage is in difficulties, in the hope it will escape attention. This is unlikely to be successful as disclosure of the account will reveal it and there is a duty on both parties to provide full disclosure of their respective financial positions.
Where both spouses are actively involved in the company I have had suggestions that they continue to work together post-divorce. I would usually counsel against this. The likelihood of this continuing to operate harmoniously is slim and substantial disruption to the smooth-running of the business is best avoided.
What precautionary measures can be taken?
A pre-nuptial agreement prior to marriage, or a post-nuptial agreement whilst the marriage is in place, may assist should divorce occur. It will be a document the Judge will consider as evidencing your intentions and contributions prior to marital breakdown. A specialist matrimonial solicitor will be able to help you with the preparation of these documents.
Keep business and personal assets and finances distinct. This will make it easier to disconnect the business as a separate entity should divorce occur.
You may want to consider involving others formally in the business, as this makes it harder for the courts to conclude the business is simply an alias for one spouse and can be considered as such. That said, this needs to be balanced with the potential for others to interfere in the business and a balance of risk exercise would need to be undertaken before this is considered.
For advice on how your business will be affected by a divorce or any other family law matters, pelase contact our Family Law team on 0161 475 7676.