Business assets and divorce

Divorce proceedings can be complex, particularly when business assets are involved.

The starting point for divorce finances, under the Matrimonial Causes Act 1973, is that the courts aim is for a fair division of assets, but this does not necessarily mean a 50:50 split. There are many aspects and factors such as children, contributions, liquidity, and future financial needs to reach a fair outcome, which may result in an unequal division.

Business assets present particular difficulties and complications, especially where a family owned and run small business is involved and where there are other shareholders in a private limited company where 1 of the spouses owns shares and/or is a director.

It is important for the non-business-owning spouse to be realistic when negotiating settlement terms. Small and owner-dependent businesses may not be easily saleable or transferable. Seeking an equal share may not be practical or in their long-term financial interests, particularly if the business lacks liquidity or a steady income stream. Instead, prioritising stable assets such as property or pensions may offer greater financial security.

Valuing business assets for divorce

Determining the value of a small, privately owned business is crucial for settlement negotiations. Key valuation methods include:

• Net asset valuation (balance sheet assessment)

• Earnings-based valuation (profit multiples)

• Market-based valuation (comparing similar businesses)

For small businesses, valuation often considers the income generated by the owner. The court may examine:

• Sustainable earnings rather than one-off profits.

• Personal goodwill versus business goodwill.

• Whether the business is the primary income source for one or both spouses.

• The extent to which the business provides financial stability post-divorce.

Expert forensic accountants are often required to ensure a fair and accurate valuation, particularly where income is irregular or business expenses are intertwined with personal finances.

Complications with other shareholders’ rights

If the business has other shareholders, they will have legal rights which often include a shareholder agreement restricting the transfer of shares and/or company articles of association that include pre-emption rights preventing an ex-spouse from acquiring shares.

Risks associated with disrupting a small business on divorce

Key concerns include:-

• How ownership and control will be affected if shares are transferred.

• The risk of business disruption due to financial settlements.

• Whether the business should be sold or restructured to meet financial obligations.

Options for dealing with privately owned business as part of divorce finances

Possible solutions can include :-

• Buyout options - one party may buy the other’s interest in the business, allowing the company to continue without disruption. This can be financed through lump sum settlements, deferred payments or offsetting against other assets (e.g., property, pensions)

• Retaining business shares in exchange for relinquishing rights to property - One spouse may keep the business while the other receives a larger share of the marital home or other real estate.

• Pension offsetting: A spouse keeping the business interest may compensate the other through a larger share of pension assets.

• Investment portfolios: The spouse retaining the business may forgo other financial assets such as savings or investments.

We can help

Divorce involving business assets requires careful legal and financial planning. Seeking early legal advice, obtaining expert valuations, and exploring pragmatic settlement options can help minimise risk and ensure business continuity while achieving a fair resolution.