Running your own business can be the fulfilment of a lifelong dream, but it also brings stresses and strains which sometimes contribute to relationship breakdown. It certainly adds complexity when trying to agree a financial settlement after divorce.
‘The key challenge is to achieve a fair settlement without jeopardising the long-term financial health of the business upon which both people may still need to rely,’ says Debra Taylor, family law expert with Richard Reed Solicitors. ‘Determining a valuation for any business takes skill and tends to be a more complex exercise than valuing other matrimonial assets such as the house or a pension.’
Obtaining a business valuation
Like all other matrimonial assets, it will be necessary to obtain a valuation of the family business or private company. In order to achieve a fair settlement, it will be necessary to understand what the company or business is worth and what income is generated from it.
It is usual for an independent valuer, normally an accountant, to be appointed in order that a true and fair assessment of the business can be made. They will need access to information and business accounts, and this is normally provided by way of ‘discovery’ when information is provided from the spouse(s) involved in the business.
If any gaps in this information are suspected, then the valuer may request that further information is provided in order that they can provide an accurate valuation.
Reviewing a prenuptial agreement
Aware of the risks to a family business, founders sometimes encourage or even insist that younger members enter a prenuptial agreement when they get married to protect established business assets.
If you have such a prenup, then the first step will be to look at this and see what was agreed. It is not uncommon for the capital value of a spouse’s interest in the business to be protected entirely in a prenup, meaning it is ring fenced from the assets to be divided. Sometimes the interest in the business is limited in a certain way, for example, only taking into account certain business assets or ventures.
It is also possible for couples to have entered a postnuptial agreement after marriage, which may impact the business division in the same fashion as a prenuptial agreement can.
Appointing a joint valuer
If you are both involved and can agree, you may wish to consider jointly appointing an expert to value the business. This means that the valuer will be instructed by you and your spouse together; they tend to be paid by you both equally and will provide a single expert opinion for you both. This can save time and costs in arguing over valuations. We can advise you if this is appropriate in your individual circumstances.
Factors affecting the valuation
The valuation will depend on a number of factors, including the following:
- Business structure – it is essential for the accurate valuation of the business to understand its ownership structure – whether sole trader, a partnership or LLP, a limited company with one or more shareholders. The presence of and implications for partners or shareholders will be taken into account.
- Employment – if one spouse is an employee of the business, rather than an owner, then it may also be necessary to obtain employment law advice depending on the intended settlement of the business asset and whether they are likely to remain involved with the business.
- Business assets – a service may have few fixed assets compared to an investment business with a portfolio of bricks and mortar or a manufacturing business with plant and machinery. Invisible assets also need to be considered – such as goodwill and intellectual property (patents, trade marks, designs or copyright).
- Trading pattern – an analysis of historic trading profits and predicted future income will be essential. Subscription businesses such as software-as-a-service may benefit from a predictable income stream, while other businesses may be seasonal or subject to fashion or significant market fluctuations.
It is important to appoint a valuer who has extensive experience in your type of business in order to obtain an accurate valuation.
Disputing a valuation
It is not uncommon for a business valuation to be disputed during a divorce. For example, the spouse not involved in the business may be skeptical of a low business valuation if the couple previously enjoyed a high standard of living. The owner of a business may seek to downplay its value, this can be done in a number of ways, such as delaying progress on trade deals or applying for patents to increase business value. On occasion owners have even sought to hide business assets in offshore accounts or under complex trusts to give the impression the business is not doing as well as it is.
If you dispute the business valuation of your spouse or you do not feel they have been upfront about the true nature of the assets or income of the business, then it may be necessary to obtain an order from the court for discovery on specific information.
We have extensive experience in scrutinising business accounts and company structures and can advise you if an application to the court will be necessary.
What happens next
It may be that the business interest can be set off against other assets such as a pension in order that one spouse can still continue with the business unaffected. If that is not possible then looking at maintenance payments linked to profits may be an alternative option.
The courts tend to be very keen to allow a business to continue as a going concern, and this sometimes means that creative options will be looked at to enable a fair settlement to still be achieved.
If the business is a family run home-based business where children of the family are involved, then they may also have rights which are covered in our recent article on that topic.
How we can help
Obtaining early expert advice is important in order that an accurate valuation can be obtained, and a fair settlement agreed for both spouses.