Divorce — what happens to my business in a financial settlement?

Seeking a divorce (or the dissolution of a civil partnership) can be a complex and challenging process. For business owners, it can be even more so. Here, family law and divorce specialists Katie Coleman and Peter Glascott explore the process of valuing a business for the purpose of reaching a financial settlement upon divorce or dissolution and outlines the key considerations for business owners.

How do courts deal with businesses in divorce cases?

The Family Court takes a holistic approach to financial settlements on divorce or the dissolution of a civil partnership. It considers all the assets and ‘financial resources’ of the couple, including businesses.

Before a financial settlement can be reached, the separating couple and court will consider several factors including the value of the business, the contributions each party has made to the business, the ownership of the business and the impact that a financial settlement may have on the future viability or cash flow of the business. It is also important to consider the tax implications, including the transfer of shares and potential cash extraction.

The Family Court may also take into account any pre-nuptial or post-nuptial agreements that the couple entered into. Nuptial agreements can help to clarify how assets (including businesses) will be divided in the event of a divorce or a dissolution. While not legally binding, they will generally be upheld if they have been freely entered into with a full appreciation of the implications.

What happens during a business valuation?

During a business valuation, a professional valuer — usually a forensic accountant — will examine a range of factors to determine the value of the business.

These may include:

1. Financial statements — including balance sheet, income statement and cash flow statement to assess the business's profitability, liquidity and solvency.
2. Market conditions — including supply and demand for the business's products or services, as well as economic trends and forecasts.
3. Assets — including any property, equipment and inventory.
4. Liabilities — including any loans or outstanding debts.
5. Industry/sector trends — including the performance and value of similar businesses in the same industry.
6. Management and personnel — including the quality and experience of its people.
7. Intellectual property — such as patents or trade marks.
8. Future prospects — including potential growth opportunities, as well as risks and challenges.

Taking all these factors into account, the valuer will produce a valuation report to inform negotiations for the financial settlement. To ensure an accurate and fair valuation, it is important to ensure that the valuer instructed is experienced and impartial.

How are different types of business valued in divorce cases?

Businesses can have different characteristics that affect their sale value.

Here are some examples:

1. Service-based businesses — such as consulting firms — are often valued based on their revenue or profits. The value of the business is often calculated based on a multiple of its earnings before interest, taxes, depreciation and amortisation (EBITDA), with the multiple dependant on factors such as growth prospects, industry trends and market conditions.
2. Manufacturing businesses — which often have a significant amount of tangible assets — are often valued based on their net asset value. This involves calculating the value of the business's assets (such as machinery and inventory) and subtracting any liabilities to arrive at the net asset value.
3. Retail businesses — such as shops and stores — are often valued based on their revenue and profitability. The value of the business may be calculated based on a multiple of its gross revenue or net profits, with the multiple depending on factors such as location, customer base and growth prospects.
4. Technology businesses — such as software companies — may be valued based on a variety of factors including revenue, profits, intellectual property and user base. These businesses often have intangible assets that are difficult to value (such as patents and trade marks) which can affect their overall value.

It is important to note that business valuations for sales purposes can be complex, and businesses may require different valuation methods depending on their unique characteristics.

How to dispute a business valuation

If you believe that a business valuation is inaccurate, there are steps you can take to dispute it.

Primarily, you should review the valuation report carefully to understand the valuer’s methods and assumptions. This will help you to identify any areas of disagreement and provide a better understanding of how the value was calculated.

If you identify errors or omissions in the valuation report, raise them with the valuer and ask them to review and revise their report if necessary. Gather evidence to support your position — this may include financial statements, tax returns and other documents that can demonstrate the business’s value. In such circumstances, you may need to engage a ‘shadow accountant’ who can act on your behalf and check the valuer’s work.

If the valuer was appointed by the court as a single joint expert, it will be more difficult to dispute the valuation. You will need to provide evidence to the court to demonstrate why the valuation is inaccurate. This may include engaging a second expert witness to provide an alternative valuation or presenting evidence that contradicts the assumptions made by the original valuer.

What happens after a business is valued?

Once the value of a business has been established, this can be used to assist in negotiations to reach an agreement as to how finances will be divided. This agreement can be filed with the court by way of a ‘consent order’. The court can consider this order and if approved it will be made legally binding.

If financial remedy proceedings are ongoing and the separating couple cannot reach a settlement by negotiation alone, the court will consider a range of factors in deciding what an appropriate outcome might be, including the length of the marriage or partnership, the age and health of the parties, their respective contributions to the marriage or partnership and their future earning capacities, as well as an analysis of the guidance set out in Section 25 of the Matrimonial Causes Act 1973.

The court will also need to consider whether the business is a ‘matrimonial’ or ‘non-matrimonial’ asset. Depending on the relevant factors and respective positions of the parties, the court can decide how the business will be dealt with in the financial settlement. A specialist family lawyer can advise you on how your business is likely to be treated upon divorce or the dissolution of a civil partnership.

The Family Court has wide ranging powers to make orders and businesses may be dealt with as follows:

• One person may acquire the other person's share of the business, or one person’s shareholding might be transferred to the other. As a result, only one person will retain their interest in the business while the other will receive their share of the business's value in the form of other assets, such as property or cash. This is common where the separating couple seek a ‘clean break’ from the other after divorce or dissolution and/or where one person had a greater interest or input in the business than the other.
• The ownership of the business may be divided between the parties. Shares can be transferred between the couple so that both will continue to own part of the business following their divorce or dissolution. This is less common, as maintaining an ongoing business relationship following divorce or dissolution is generally undesirable to separating couples.
• If the above options are not possible, the business may need to be sold. This can be a difficult decision, particularly if the business has been in the family for a long time. However, in some cases, it may be the only option to achieve a fair financial settlement.

Businesses may also be considered in relation to calculating spousal maintenance payable from one spouse to the other. The value of the business may be taken into account when assessing the income and future earning capacity of the spouse who relies on it for their income. This can be a complex process, as the court must balance the needs of the spouse who relies on the business with the needs of the other spouse. This is not an issue in the dissolution of civil partnerships, as they are not subject to the same financial orders.

It is important to consider the tax consequences of dealing with businesses on divorce, whether this relates to the transfer of shareholdings or cash extraction to meet a financial settlement. Indemnities may also need to be given if one partner has previously been involved in the business but does not intend to be in the future.

Dealing with businesses upon divorce or the dissolution of a civil partnership can be highly complex. If you need advice, get in touch with a member of our family law team.