In this article Family Law Solicitor Daniel Rushton, explores the implications of divorce on an owned business.
One fear for many business people is how their business will fair when they face divorce proceedings. Are those fears justified?
It is often the Golden Goose of assets, in that it is the source of income for one or both parties and even if only one party benefits from it directly, it is often the source of either child or spousal maintenance and killing the goose, whilst it may feed the family immediately, will leave everyone worse off in the medium to long term.
Unfortunately, there is no simple answer to whether the goose will survive or face the axe, but the existence of the business does tend to create of a lot of interest from the other party’s solicitors and can lead to both parties incurring far higher legal costs than would otherwise be the case, in circumstances where it is not always justified.
Historically, the fact that one of the parties to the divorce owned a business would automatically involve expensive independent forensic accountant’s report, at the expense of both parties, to see just how fat the goose is.
The Courts have more recently made it clear that businesses should only be valued where there is some point to it or if it likely the business will be sold, recognizing that its often better to let the goose live and that sometimes, the goose will only lay eggs for its master, in that the value in the business lies only in the expertise and hard work of the principal.
Clearly, there is a big difference between a multinational public limited company and a sole trader but there is no formula to determine whether a business should be valued and whether its value will be taken into account on a matrimonial settlement.
Looking at the factors that may indicate a valuation should take place may give the business owner some idea of the steps to take when forming a business to ensure it is not overly influential in the matrimonial settlement.
Do the parties own a substantial proportion of the business? Who owns the remainder?
If the goose is owned by more people, the Court is going to be less likely to order its execution, as the innocent co-owners will lose out.
If business assets and personal assets are intermingled, it is more likely the Court will include the business as an asset of the marriage, whether or not there is a formal valuation.
It is therefore important, as far as possible, to keep the business assets separate from the matrimonial assets. It is especially important if at all possible to avoid securing any business lending against the matrimonial home although for most small businesses, this is something that is likely to be hard to avoid.
Is there any prospect of the business being sold? If the goose is already in the crate, ready to head to market, its value will soon be realized and is therefore more likely to be taken into consideration.
The age of the farmer will be relevant as well: if the farmer is approaching retirement age, there is a prospect of the business being sold or wound up. If there are plans in place for the farmer’s children to keep running the farm, the goose may be less vulnerable, depending how cogent these plans are.
Are there complicated structures involving trusts and holding companies? If the goose is being looked after by someone else, especially if they happen to live in a country where geese are revered (i.e. a tax haven), then the Court is more likely to ponder over the value of the goose and is entitled to assume the goose is very fat and possibly consists of a gaggle (or a skein if they are in transit).
It is only really worthwhile looking at these types of arrangements if the business is seriously lucrative. This would need the involvement of specialist accountancy advice.
Clearly the accounts for the business will have an impact on the Court’s decision and a valuation is more likely if they show sizeable profits and turnover.
They will also give rise to interest if the business appears to be rich in capital assets, especially cash, so when the golden eggs are laid, unless there are strong business reasons to keep them in the business, it may be a mistake to keep them, as the Court, via an accountant, will looking into the liquidity of the business.
A difference in the standard of living and the profits shown by the business may also raise eyebrows.
Protect the Business Prior to Marriage
If you are unfortunate enough to be facing the prospect of divorce now, then it is too late to safeguard the goose in many respects, but what if the are no clouds of divorce on the horizon or the prospect of marriage has not arisen?
If you are already married, you have time to structure your business to protect it for the future taking into account the points made above, so you may want to speak to your accountant or solicitors or preferably both about steps you can take in your particular circumstances, but obvious things to avoid are the placing of shares in your spouse’s name and them being actively or even nominally involved in the business, although you then have to weigh in the balance the tax benefits that can bring.
What if you have not tied the knot yet? The most obvious (although least romantic) solution is not to marry.
Cohabitants have no automatic claim on anything unless it is jointly owned or some form of equitable trust is deemed to have been created (i.e. “of course it’s half your goose, darling, you just need to clean it, look after it and feed it”).
This may not be an option, but pre-nuptial agreements are increasingly being recognized by the Courts and, as long as they are ‘fair’ in the broadest sense and are not imposed by one party on the other, if done properly, they can now be very effective tools in preserving a business.
Even if you are already married, it is possible to enter a ‘mid-nuptial agreement’, which should in principle attract the same consequences as a pre-nuptial agreement.
The difficulty here is that negotiating terms will be very difficult without sounding the death knoll for the marriage, but are sometimes used where parties have separated, but have gone on to make up their differences.
This is a specialised area of law and it is important to get the right legal and specialist accountancy advice in respect of your situation.
Daniel has over 20 years’ experience as a specialist family law solicitor. He is Head of the Family Law team at Grindeys Solicitors based in Stoke on Trent.
Daniel has a particular interest and experience in dealing with business owners, company directors and members of the medical profession in matrimonial situations. For this type of work a solicitor who understands your business accounts and business structure is vital to obtain the best financial settlement possible.
Recent cases include one involving an international business and extremely valuable assets and pensions, as well as property abroad.
He has acted for numerous doctors and other medical professionals, council workers, police officers and serving members of the armed services. In twenty-three years, Daniel has dealt with all walks of life and will adopt a professional yet caring approach to your situation.