Your Business on Divorce/Dissolution

While the breakdown of a marriage is complicated enough, when your co-founders of a business it gets even trickier. Here’s what to consider…

Your Business on Divorce/Dissolution

Business assets

On the breakdown of a relationship, any business owned jointly, solely or contains an interest, will need to be valued and perhaps, need to be restructured to effect any settlement.

Settlements now centre on contributions to the business and homemaking during the marriage or civil partnership, with both regarded as of equal merit. It is important to understand the nature of your business and how it operates. Full and frank financial disclosure is required including examination of up to five sets of audited accounts and up to date management accounts, if they exist.

Since the landmark decision of White v White (2000), where there are more than sufficient assets to meet the needs of the parties, as a starting point the court must consider a 50:50 division as a measure of equity. Mrs White was granted a 40% share of the couple’s family business, necessitating sale of the business to meet her settlement.

Factors to consider in respect of the business

  • Who started the business?
  • Was it started before or during the marriage/civil partnership?
  • What involvement and contribution has the other party made both historically and does this continue?
  • Are there other business partner/shareholders outside the family involved?
  • Is it asset/machinery driven or is it service sector?
  • Is there a market for the sale of the business or shares?
  • Can money be raised from the company?
  • Are there shareholder agreements or restrictions on selling shares?
  • What is the determinable maintainable profit?
  • What is the equity/debt weighting of the business?
  • Is there an appropriate price/earnings ratio?
  • What is the SWOT analysis for the business?
  • Has there been any family business succession planning – are any children to be involved in the business?

Possible divisions

The court has a thorny task in allocating assets so that both parties can lead separate lives. The court will review each party’s involvement in the business. Any direct participation is likely to lead to a stronger claim. Only in exceptional cases will the business be sold and this is particularly unlikely where the business is the prominent source of income for the family.

Where the business is not sold, the court will balance the reasonable requirements and contributions of the parties. Any liquidity will be assessed against the immediate access to other assets. Moreover, the effect of any extraction of liquid assets from the company will need to be analysed against its ability to effectively operate in the future.

Questions to be posed include:

  • Can any assets e.g. land, property or bank balances be transferred to the other party without damaging the business?
  • Can the other party be compensated with a greater proportion of the joint home, savings or investments?
  • Can a lump sum be paid over a period of time?
  • Can a proportion of the net proceeds of sale be made in future?
  • Can any healthy income stream generated support the children?
  • Are ongoing maintenance payments possible, and if the business is sold in future, is there an option to capitalise maintenance at that stage?

It is necessary to seek a realistic and pragmatic business solution even if it does not result in a clean break (A v A (2004)). This is particularly prevalent where there is wide latitude in valuation of the business and the ability to raise funds without unjustifiably endangering the business (D v D and B Ltd (2007)). In the recent case of H v H (2008), it was held that periodical payments via an income stream from the business resulted in less disruption to the business than a division of its assets.

While each case will depend on its own facts, it is prudent to seek legal advice at the earliest convenience. Protecting the business assets is the primary concern for the business owner who is sadly going through a relationship breakdown.


Edward Daniel SolicitorsEdward Daniel, solicitor at Edward Daniel Solicitors in the City of London (EC3V). Edward is well known for advising high net worth individuals and entrepreneurs. 

This publication is a general summary of the law. It should not replace legal advice personalised to your particular circumstances and needs.

 

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