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Dividing Business Assets in Divorce
If you and/or your spouse have an interest in a business, this will need to be considered when deciding the financial aspects of your divorce. JMW has acted for numerous entrepreneurs, shareholders, partners, members of LLPs and sole traders, their spouses and, in some cases, other family members.
Our team will spend time getting to know the business and how it fits into the overall context of the family finances.
If you would like to discuss the treatment of business assets in a divorce, whatever your role, call us for an informal chat on 0800 652 5577 or fill in our online enquiry form and we will call at a convenient time for you.
How JMW Can Help
Businesses come in many different forms and can be:
- Kitchen table
- About to float
- In trouble
- Trading companies
- Professional partnerships
We appreciate the great diversity of our clients’ businesses and understand that, first and foremost, there is no one size fits all solution. We work hard to understand how a business functions in the “real world” and we will capitalise on our contacts with leading accountants, valuers and taxation experts to ensure the best outcome for you and your family.
Considerations for Dividing Business Assets
A key part of reaching a financial settlement on divorce, whether by agreement or within court proceedings, is to exchange full and frank financial disclosure. Business assets are included within this process.
The level of detail required will vary from case to case, depending on the complexity of the business and the extent to which matters are agreed. As a minimum, a person with an interest in a business will usually have to provide the last two years’ business accounts (financial statements).
No two cases are alike but there are some key principles to consider:
- The courts are reluctant to sell or break up businesses in order to realise capital
- Business continuity is respected wherever possible, particularly as the business may be a major source of income for the parties
- The courts will take account of the taxation and operational consequences of extracting capital from a business or restructuring it when deciding what to do
- There can be different ways of sharing business and non-business assets in order to allocate future risk fairly among the parties
- If substantial business assets were built up prior to cohabitation/marriage it may be possible to argue that they should not be shared in the same way as other assets, especially if there is a properly-drafted pre or post-nuptial agreement to this effect.
Valuing a Business
In some cases, a business may be no more than a vehicle for self-employment. However, other businesses do have a substantive capital value that can be meaningfully included on a list of the parties’ assets. If so, a valuation by a forensic accountant may be commissioned either by agreement or by order of the court. But what does this mean in practice?
The parties (generally via solicitors) will jointly agree the identity of an accountant who has suitable experience for the task of valuing the business. If there is no agreement, the parties will put forward competing experts and the court will decide which expert has the best knowledge to value the business accurately. Very occasionally, the court will allow the parties to appoint their own experts to produce separate valuations but this is not the norm.
In complex cases, one or both parties may choose to instruct an accountant who advises them and their legal team on the business aspects of the case. They are sometimes known as a shadow accountant.
The accountant who is asked to value the business will request a range of information from the party who is involved with the business. The list will depend on the nature of the business but may include:
- Financial statements
- Management accounts
- Cash flow forecasts
- Order books
- The articles of association or partnership deed
- Valuations of any particular assets owned by the business
The accountant will then produce a valuation report which will usually set out:
- The value of the business
- How they have reached that figure
- Any discounts from the full value for minority holdings
- Any underlying tax considerations
- How much income the business can sustainably produce
- Any other specific questions the parties have raised
There is then an opportunity for each party via their respective solicitors to raise questions of the accountant to clarify any aspects of their report.
Depending on the stage the case has reached, the business valuation will inform negotiations between the parties and, if necessary, help the court to decide the outcome if the parties cannot agree a settlement between themselves.
Concerns about Non-disclosure
There are sometimes cases where one party will attempt to manipulate the information provided to the accountant or exaggerate a business’s poor performance in order to get it valued at as low a figure as possible. Accountants and the courts are prepared for this and do not make assumptions in either direction without a sound factual basis.
In cases where there has been a sustained attempt to misrepresent the position, the courts can request additional evidence and expert reports in order to establish the true position. If you are concerned this could be an issue in your case, it is important to say so early on. Our long experience of representing business owners and their spouses enables us to spot the early warning signs when something does not look right and act decisively where non-disclosure may be a factor.
If you are facing allegations of non-disclosure as a business owner, we will act swiftly to help you assemble the necessary information to meet these concerns and address any queries in a proportionate way.