Sorting out or valuing a family business during divorce or dissolution can be complicated. But the more you can agree, the less it is likely to cost you. How a business is taken into account when you separate will depend on a number of factors. Find out where to start and what the options are.
- Business interests and financial settlements
- Valuing a business
- Disputing a valuation of a business
- Your next step
Business interests and financial settlements
In England, Wales or Northern Ireland: Any business interests and the value contained in them can generally be taken into account as one of the ‘matrimonial assets’ to be divided on divorce or dissolution.
In Scotland: Business interests will generally only be taken into account as ‘matrimonial property’ if they were set up or acquired after you were married or became civil partners. However, any increase in the value of pre-existing business interests while you were married or civil partners might be counted as matrimonial property.
The rules are quite complicated, so it’s probably best to get legal advice.
How courts deal with businesses in financial settlements
If it is possible, the courts tend to leave the business owner with the business and compensate the other partner with a larger share of the other assets and/or maintenance.
Very often, this is what the couple want themselves.
The courts can be flexible; for example, it might be possible to share the income or divide the shares.
Ideally, the courts prefer not to leave one person with all the cash assets and another with assets that are tied up in something like a business.
However, in practice, they often do just that.
Valuing a business
If you and your ex-partner (husband, wife or civil partner) own a business outright, or has a significant shareholding in a business, then the business would normally be valued for the purposes of the financial settlement.
For shared business interests, either of you can arrange a valuation.
Generally, if one of you owns it (outright or with others), he or she must ask for the valuation.
The process might not be straightforward, especially if the business is privately owned.
Valuing a business might depend on:
- Its assets, such as property or stock that it owns.
- Its earnings (namely the profit it is expected to make in the future).
- The structure of the business: whether it’s a limited company, sole trader or partnership.
Valuing a business can be complicated and, as a result, can cost thousands of pounds. Before you instruct an expert, it’s a good idea to get some legal advice.
Understanding the different types of business structure
There are different ways to structure a business.
If you’ve been involved in the business, you are likely to know the difference between them.
But if it’s your ex-partner’s business, you might not know how the business has been set up.
Here is a quick overview:
Sole trader: the owner controls the business assets, but he or she is also personally liable for any business debts. The income and profitability are the most important figures, although business assets, such as premises or vehicles, might also be taken into account.
Partnership: this might be an informal partnership, with no written agreement, or a formal one. If other people – apart from you and/or your ex-partner – are involved, then valuing it will be more complicated and you are more likely to need expert help.
Limited company: As with partnerships, valuing a limited company will be more complicated if other people have a stake in the business. If you and/or your ex-partner own all of the shares, it might be relatively straightforward to value.
Disputing a valuation of a business
Couples who are divorcing or dissolving their civil partnership might not always agree about how much a business is worth, especially if only one partner has been involved in it.
Sometimes the business owner might appear to undervalue their business (possibly dramatically).
If you don’t agree with the figure your ex-partner says the business is worth and he or she isn’t being co-operative, you can apply to the court to get information from his or her bank or accountant directly.
Bear in mind that:
- Using experts to help you get a true value of the business can be expensive. In some cases, people have spent many thousands of pounds on specialist accountants. But this might be the only option if your ex-partner is being uncooperative or provides a particularly low valuation.
- The fortunes of the business might have taken a turn for the worse recently. Just because the business was doing well last year or the year before doesn’t mean it will be doing well now.
- Business owners can be optimistic about their own business and you might have been led to believe it was much more profitable than it really is.
Resolving a dispute
If you think your ex-partner has undervalued the business (or the increase in the value of the pre-existing business while you were married or in a civil partnership in Scotland), you have several options:
- You could ask your solicitor (if you are using one) to look at the company’s books to see if further investigation is worthwhile.
- You and your ex-partner could agree to appoint what’s called a ‘single joint expert’ to value the business. This person is independent of each of you and is there to provide an impartial valuation. Make sure you take legal advice before you do this.
- You could each appoint your own expert. This is likely to be the most expensive and complicated option and is not used very often.
- You and your ex-partner could explore mediation or other dispute resolution methods in place of experts to help resolve disputes over dividing business interests.
Your next step
Find out about a Clean break or spousal maintenance in England, Northern Ireland or Wales, or a Clean break or periodical allowance in Scotland as part of your divorce or dissolution financial settlement.
This article is provided by the Money Advice Service.