How do the courts deal with family businesses on divorce? At bbl, we deal with many couples who have their own business, either companies or partnerships or sole traders. There can be issues about:
- Valuing the business (or the relevant share of the business)
- Should the value of the business be shared on divorce – is this fair?
- What about businesses set up prior to the relationship? Or family businesses that have been trading for years?
- What income can be taken from the business?
- Does it matter who are the business owners/shareholders/officers?
- What can be done to protect a business from the impact of divorce?
- Valuing a minority interest.
- Are the books reliable?
Generally the courts have wide powers under the Matrimonial Causes Act to make adjustments to a couples finances. The court cannot usually make orders against a company.
The first questions are relevance and proportionality. There is no point spending money on legal and accountancy fees to value a business which is, for example, simply a vehicle to earn income.
The next step is to look at the accounts and other financial information to see whether that is enough to provide information about the value of the business. The balance sheet is a snapshot value of the assets on a particular date, but what about goodwill, or the impact of directors loans?
If necessary the business can be valued. The Family Procedure Rules set out a process for obtaining independent valuations on a joint basis.
Usually the main player in the business will keep it, and the other spouse will be compensated by receiving other money or property. The court will be wary of doing anything which could adversely affect the business – there is no point making orders which could hamstring the business. Alternatively the couple may continue to run the business together – this could avoid the difficulty of valuing a business, but it requires a good working relationship and trust between the couple.
Accountants when valuing businesses usually look at the historic earnings of a business and apply a multiplier, after taking into account the costs of replacing the spouse if they will no longer be involved, and any other irregular or one off expenses in the accounts.
The court also has to look at the reality of company law and shareholders agreements. Are we dealing with a small family business where the shareholders are likely to support each other? Or are there arms length business partners? The court may be less likely to apply a discount for a minority interest if the other people involved in the business are family members who are likely to work together in the future.
Feel free to contact any of our solicitors for more advice about dealing with businesses on divorce.