Dividing a Business in Divorce: What Every Business Owner Needs to Know

Is a Business Considered Marital Property?

In England, Wales, and Northern Ireland, business interests will generally be considered by the court as matrimonial assets, and their valuation will therefore need to be added to the matrimonial pot.

This is irrespective of which spouse founded or ran the business. Your share of any value in the business will be taken into account when calculating the overall matrimonial pot to be divided between spouses.

But in Scotland, business interests are only counted as matrimonial assets if they were acquired post-marriage.

To understand if your business is at risk, seek legal advice early and gather financial documents to show its value at the start of the marriage. This can help differentiate between pre-marriage and marital growth.

What Can Happen to a Business in a Divorce?

If you are reading this article you may be asking, “What happens to my business in a divorce?”

Well, it generally depends on several factors including whether the business only belongs to one individual spouse, for example, they founded and managed it alone. In this case, the courts will normally try to ensure that the party retains their ownership in full.

Your business will indeed be considered an asset in a divorce, but that does not mean it will be split in half.

Should this be the case, then instead of having to share the business interests with their ex, they will have to give up other assets (For example, their portion of the marital home) as a substitute for the value of the business assets.

Sorting out or valuing a family business during divorce or dissolution can be complicated, and the courts aim for a fair outcome based on overall contributions.

If alternative assets are insufficient, it may be necessary to transfer a certain number of shares in a private company (in the case of a limited company) to the other spouse.

Can my wife take half of my limited company?

In the case of family businesses (eg where both spouses are company directors and own an equal number of shares), the situation can be more tricky.

If the couple split up amicably, they might be able to carry on as business partners.

Alternatively, one party could retain their shares but become a ‘sleeping director’ and allow their ex to manage the business.

Otherwise, one spouse can sell their shares to a new director, or their ex can buy them out.

The same principles apply to partnerships.

If no solution can be reached, the divorcing parties will either need to sell their business or go to court and ask the judge to make a decision.

Regardless of how you decide to divide the existing business assets, you will need the assistance of a solicitor to draw up a consent order for you.

This legally binding order sets out to the court how you intend to divide up the business assets as part of your overall divorce settlement.

Applying to the court to end your financial commitments will prevent both parties from making any future financial claims, even years in the future.

For more details: Is a Limited Company Protected From Divorce?

If my husband owns a business, do I own it too?

Whether you have a claim to ownership of your husband’s business in the event of a divorce depends on the legal structure of the business and how it has been treated during the marriage.

For example, if the business is a limited company, ownership is determined by shareholding. Unless you are listed as a shareholder or partner, you don’t have direct legal ownership of the business.

Even if you do not have legal ownership, the value of the business is often considered when dividing matrimonial assets during a divorce. The court will look at the contributions each spouse has made to the marriage, which can include financial, practical, and emotional support.

If the business was built up or developed during the marriage, it is likely to be considered a joint asset to some extent, regardless of whose name is on the ownership papers.

The business will be valued, and its worth will be considered in the financial settlement. You may be entitled to a portion of the value, but this does not necessarily mean you will take over part of the business.

Instead, you might receive other assets to offset the value of your husband’s business interest, or there could be an arrangement for payment over time.

It is important to note that every divorce case is unique, and the treatment of business assets can vary widely. The court’s aim is to achieve a fair financial settlement for both parties, taking into account all circumstances of the case.

How Are Business Assets Valued For Divorce?

There are several professional methods to value a business during divorce. The most common include:

1. Income-Based Approach: This method calculates the business’s future earning potential based on past and projected income. It’s commonly used for service-based businesses.
2. Asset-Based Approach: The value is determined by the company’s tangible and intangible assets (e.g., equipment, property, goodwill) minus its liabilities. Suitable for businesses with substantial physical or financial assets.
3. Market-Based Approach: Compares the business to similar businesses sold in the market. This approach is used when a sale is being considered or the business is highly marketable.

Courts may also account for goodwill and fluctuating market conditions, so providing detailed and accurate financial records is crucial.

The business owner will need to provide an estimate of the business value in Form E, backed up with company accounts and a letter from their accountant.

The valuation should take into account a range of elements, such as:

• Total business assets including cash reserves, property and stock
• Annual turnover and profit for previous years
• Expected profits based on new contracts
• Business debts

Hire an independent forensic accountant or business valuation expert to ensure accuracy and fairness, especially if the valuation is contested.

How to protect your business assets

It is theoretically possible to try and ‘ringfence’ the assets of a business owned before marriage, to prevent them from forming part of marital property.

Women often come out on the financial short end in a divorce, particularly if they took time away from work to raise children.

This means courts will consider compensation through a fair settlement, even if they were not directly involved in the business.

However, in a long marriage, even assets that are kept entirely separate may still come to be considered as part of the matrimonial pot by the court.

Practical steps to protect your business:

• Use a prenuptial or postnuptial agreement to outline the treatment of business assets in the event of divorce.
• Maintain separate financial records for business profits and personal finances to reduce the risk of them being included in the matrimonial pot.
• Consult a solicitor early to explore asset protection strategies, such as restructuring ownership or offsetting business assets with other marital property.

Can you sell a business before divorce?

Yes, it is legally possible to sell a business before a divorce in the UK. However, there are significant legal and ethical considerations to be aware of.

If the sale of the business is seen as an attempt to reduce the assets that would be available for distribution in the divorce, the courts may view this unfavourably. This is sometimes referred to as “dissipation of assets.”

The courts can scrutinise transactions that occur shortly before or during divorce proceedings.

If you do decide to sell the business before the divorce, it is crucial to ensure that the business is sold at a fair market value. Selling the business at an undervalue could be seen as an attempt to defeat the other party’s claim and can be challenged in court.

It’s worth noting that the proceeds from the sale of a business would still be considered in the financial settlement of a divorce. The courts will consider all financial resources each party has, including any money or assets received from the sale of a business.

Once divorce proceedings have started, the court can issue orders to prevent the disposal of assets, including the sale of a business, until the financial matters between the parties are resolved. These are known as “freezing orders.”

My husband is self-employed, am I entitled to his business?

When you are going through a divorce in the UK and your husband is self-employed, there are several important considerations to consider.

Both parties are required to fully disclose their financial circumstances during the divorce proceedings. This includes all forms of income, assets, and debts. When a spouse is self-employed, they must provide a clear picture of their business finances.

The business owned by your husband will need to be valued to determine its worth as part of the financial settlement. This can be complex, as it involves assessing not just the current profits and assets but also the future earning potential and liabilities.

The division of assets in a divorce aims to be fair, though not necessarily equal. The self-employed spouse’s business may be considered a marital asset, and its value may need to be shared or offset against other assets.

If your husband’s self-employment generates a significant income, you may be entitled to spousal maintenance.

The amount and duration of maintenance payments will depend on various factors, including your respective financial needs, earning capacities, and any impact the marriage has had on your ability to earn.