When a couple decide to divorce while owning a business together, this can add a layer of complexity to the post-split arrangements and negotiations. A business is considered formally as a matrimonial asset, and must therefore be dealt with appropriately and legally to ensure the fairest possible outcome for everyone concerned.
Business ownership in divorce can be affected by a number of scenarios and considerations, not least the type of business it is, what contributions have been made to its success and how much involvement the various parties want to have in it going forward.
Types of business assets in divorce
There are several types of business out there, and many different ways of being involved, owning or playing a part in one. So, knowing exactly what assets and contracts are involved is vital when conducting negotiations around business ownership in divorce. This will help the court decide how to proceed. For example, a business could be owned solely by one partner, or jointly by both. Other family members or business partners outside the marriage or civil partnership could also have a stake.
Understanding how the ownership is set up is also important when thinking about business ownership in divorce. For example, it could be a sole trader concern, a limited company, a partnership or even a public limited company floated on the stock market. You will need to understand the full legal implications of each type of ownership and business set-up before proceeding with dividing business in divorce. Your solicitor or accountant should be able to help with this.
Valuation of a business in divorce
One of the key questions to ask when dividing as family business after a couple splits up is how much is the business worth. Working out the valuation of a business in divorce can be done in several different ways. One key factor is the contributions that each party has made to the business during its period of ownership. This could be from directly working for the business, providing services or products and making money. Or it could be via different avenues, such as freeing up the main business owner’s time and energy by raising children, keeping the family home going or providing ‘back office’ services such as secretarial support.
Additionally, assessing value when dividing a family business goes further than looking in the bank account or checking the financial statements. There may still be tax owed, or suppliers waiting to be paid. There could be outstanding loans to pay back, or debts owing to the business that need to be chased before a full appraisal can be made regarding its worth. Stock, machinery, customer lists, future earning potential and even goodwill and a strong reputation for quality service that has been built up over years can all be factored into a valuation appraisal.
Dividing business interests in divorce
There are a number of options open to a parting couple when it comes to deciding what happens during business and divorce arrangements. These can range from one party receiving a lump sum in return for relinquishing all future interests in the business to the former couple working out a way to carry on working for the business and sharing ownership even after divorce.
Other choices can include selling the business and dividing the profits from the sale equally to allow both parties to move on with no ties to the past. One person retaining the business sis also a common outcome, especially if the person who keeps the business has been the one making the most, or even only contribution to it in an operational sense. In some cases, the business can continue to run as it is, with the income or shares split evenly.
Alternatively, one partner can keep the business in its entirety in return for giving the other different matrimonial assets like property, shares in another company or a pension pot. Finally, the business can be transferred into a trust for the benefit of any children or dependents from the partnership.