How is a business divided in a divorce?

Posted onOctober 16, 2019

Many people who are divorcing and who are shareholders in a family business assume that the family court will sort out their divorce and the division of family assets such as the family home, the joint bank account and any investment or buy to let property portfolio.

Often business owners whose wife or husband has no shares in the family business assume that the family business is ring fenced from any family and divorce law claims. In scenarios where a husband and wife are both shareholders in the family business, it is often thought that the future of the family business will be dealt with strictly in accordance with any shareholders agreement or in accordance with company law. That is because a husband or wife sees the company and the shareholding as a wholly different asset and the family business dispute as the preserve of company law solicitors.

The top London divorce solicitors will tell business owners and their spouses that businesses and shareholdings fall within family law when a couple get divorced. Even if a couple are not business owners, a divorce can be a traumatic and complicated process. The difficulties in reaching an agreed financial settlement and the animosity between a husband and wife can increase, where as well as being married and sorting out the non-business assets, there is a family business to litigate over.

How can OTS Solicitors help?

If you need expert legal advice on your financial settlement options or representation in financial court proceedings then the divorce a family law team at OTS Solicitors can help you.

For a confidential discussion on how OTS Solicitors can help you please call us on 0203 959 9123.

Is a family business a matrimonial asset?

The best London divorce solicitors advise that a family business can be treated by a divorce court as a matrimonial asset even if only one spouse is a shareholder in the company or employed in the family business.

In some family scenarios, the ownership of a family business will not make a big difference to the financial settlement. For example, a freelance technology worker who pays him or herself via a service company and the company has no assets or goodwill value, means the family business is just a shell. It is important that the best London divorce solicitors’ advice is taken on financial disclosure to make sure that the financial disclosure is balanced and cost proportionate, taking into account the nature of the family business.

In other family scenarios, the family business may be the most valuable asset, both in terms of property and cash held within the business, and the goodwill value and income generation. In those scenarios, particular care has to be taken by the top London divorce solicitors to ensure that a forensic accountant values the business.

The top London divorce solicitors advise that courts are asked to consider ignoring a family business and its value because it is asserted that the business is not a “matrimonial asset”.

If a shareholding in a company was inherited by a spouse prior to the marriage or a spouse was the successful owner of a company before the wedding it can be possible to successfully argue that the family business is not a “matrimonial asset”. However, the best London divorce solicitors will tell you that in many cases the argument is not clear-cut. For example, although a spouse may have owned or inherited a successful business prior to the marriage, should the business be treated as a non-matrimonial asset if the company value has significantly increased over the length of the marriage?

Even if the family court decides that a business is a non-matrimonial asset that does not mean to say that the court will ignore it. The best London divorce solicitors advise that a divorce court can still make orders over non-matrimonial assets if the division of the husband and wife's matrimonial assets do not meet their needs. The “needs” of a spouse is very subjective and is partially based on the length of marriage and the standard of living enjoyed by the couple during the marriage.

Is a business asset a realisable asset?

Many spouses think that a business is not a realisable or liquid asset. Although a business is not a liquid asset in the same way as cash at the bank, an ISA investment or property, a spouse can ask a court to make orders in relation to business assets.

The top London divorce solicitors say that the divorce and family court can make a range of orders over a family business and a husband or wife's shareholding including:

The sale of the shareholding; or
The transfer of all the shareholding or a proportion of it; or
An order that a spouse make money available by drawing down company funds to pay a cash lump sum to their husband or wife;
An order that the shareholder pays spousal maintenance to the other spouse. Whilst this order does not relate to the business, the level of spousal maintenance may require the shareholder to maintain a certain dividend level from the business.

Court orders and the family business

Generally, a family judge will try to avoid the sale of shares in a family business, especially where a husband or wife is not a 100% shareholder and so his or her shareholding may be difficult to sell as who would want to buy into a family business unless they can buy a controlling shareholding.

The court is also often reluctant to order the sale of a family business or a husband or wife's shareholding as without the shares the family income will dry up as most spouses say that cannot get a paid job earning as much as they do in a family business and cannot set up a new business without capital.

The court also has the power to transfer shares in a limited company from one spouse to the other. This may be appropriate where a husband and wife both hold shares in a company but one is not an active participant in the company and the court thinks that there should be a clean break so that one spouse can , in future , run the company as they see fit. If a spouse with the minority shareholding is left with their shares as part of the divorce financial settlement, they may see them as worthless unless there is a shareholders agreement in place to protect the minority shareholder.

The family business – the risk-laden asset

The best London divorce solicitors will tell you that a divorce and financial settlement involving a family business is often complicated. That is not just because of a spouse’s emotional attachment to a company that they have helped build but because of the difficulties in valuing company shares and the risks of leaving one spouse with shares in the company and the other with property and cash.

Many business owners want to keep their shares and are privately positive about the future of a family business. As a spouse often wants to retain complete control over their business, they end up receiving the riskier shares as their financial settlement. A family business is referred to by the courts as a “risk laden” asset, whereas the cash, the family home, and other property are treated as “copper-bottomed” assets and less risky.

Failure to share the copper bottom and risk laden assets between a husband and wife can have disastrous consequences for one spouse, for example, if the business fails as a result of recession or other unforeseen mishap. The court will not interfere with an order other than in very exceptional circumstances so the best London divorce solicitors always recommend that anyone wanting to retain risk-laden shares carefully thinks through the alternative options with a trusted advisor. That way they can make an informed decision on the risk and whether the value of the share have been sufficiently discounted to acknowledge the risk.

How can OTS Solicitors help?

For pragmatic expert advice on your financial settlement options where you or your spouse have shares in a family business or require representation in financial court proceedings please call OTS Solicitors on 0203 959 9123 for a confidential discussion about how the divorce and family finance team at OTS Solicitors can help you.