There are many emotive subjects when it comes to financial issues arising from divorce and a business is one of them. When consulting a solicitor for the first time to discuss matters the business owner often wants to know whether their spouse 'will get half of my business'.
The answer is not straightforward, what is necessary is to understand how businesses are treated on divorce.
The starting point is to understand that a company is a separate legal entity, one which is not party to the divorce proceedings. However, one spouse (sometimes both) holds shares in the company and those shares are an asset like any other asset in the marriage.
Therefore, like other assets, the first stage is to understand the value of the shares. This often involves instructing an expert (usually an accountant) to value the shares.
There is of course more than one way to value shares in businesses and it is for the accountant to determine the most appropriate method based on the nature of the business. They do so on the basis of there being a willing seller and a willing buyer. This does not mean that the business will be sold but it provides the market value of the shares.
When determining value account will be taken of the size of the holding so if less than 50% is held a minority discount may be applied. There may be restrictions upon the transferability of the shares which might also impact value.
Once the basic value is established account also has to be taken of any tax consequences which would apply if there were a sale and any other costs for example, solicitor’s or agent’s fees.
As with any other asset it is the net value that must be considered.
However, a business is more complex as an asset than a house for example because greater risk usually attaches to businesses - they can fail and go into liquidation. Also, where the spouse is a sole or majority shareholder you are in essence placing a value on that person and their endeavours. This doesn't happen with other assets and so this may justify a discount being applied to the net value.
For some businesses there may be no capital value because if you take the business owner out, there is nothing left; they are the business. What the company then is, is an income generator. However, earning capacity is not a matrimonial asset.
Once a value has been established it needs to be considered in the context of all other assets in the marriage. Often the value is offset against other assets which are available so that the owning spouse retains their business and the other party takes more of the other assets.
The court tries not to force a situation which would cause a sale of the business because that often cuts off the primary income stream for someone. However, if there are limited other assets or poor liquidity, that may ultimately have to be considered.
However, is it always fair to offset shares in a business against other assets such as the family home or money in a bank account? What about that element of risk that sits with the business?
An option to achieve fairness therefore may be to transfer some shares to the other spouse (or allow them to retain the shares they already hold) and deal with other assets separately. This means that both parties suffer or benefit from the future fortunes of the company. That is not always a popular option, particularly where a clean break is sought but where risk or liquidity may be an issue, it is a way to address the problems.
In summary, a business is available for sharing and meeting needs like any other asset. It is not treated in isolation and the primary aim is to allow a business to continue.It is often the means for income to be generated and thereby allows a clean break to be achieved so that there are no financial links between the parties moving forwards.
So in answer to the original question, the spouse may not ‘get’ half of the business but the value of this asset is considered in the overall assessment of capital resources available to meet the needs of the parties in the future.
If you have any questions or concerns, please contact Justine Flack ([javascript protected email address]) for further information.
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