Going through a divorce is difficult under any circumstances, but the thought of losing a business you have worked hard to build can make divorce particularly challenging. The team at Family Law Inverness have prepared this legal guide to address the main concerns of business owners when going through a divorce.
The family courts normally deal with any business as part of the Financial Settlement process in divorce, this includes all types of business whether a company, partnership or sole trader. The process ensures that businesses are valued in the course of the financial disclosure of the parties to the divorce, to facilitate a fair financial settlement. However, valuing a business can be challenging, and it can feel unfair if you have worked for many years prior to meeting your spouse to create a thriving business. In this guide we take a look at some of the most common concerns business owners have in divorce.
Is a business considered to be an asset in the divorce process?
Yes, but not always in the way you might expect. Any business you own or is owned by your spouse is considered to be an asset for the purposes of financial settlement. The value of your business will be taken into account in order for the court to assess and divide your assets. However, a business is not treated in the same way as liquid assets such as cash, and under certain circumstances a business may be treated as a means of providing income to the family as opposed to an asset to be sold and divided.
If I get divorced, do I need to sell my business?
It is very uncommon for business owners to sell their business as a part of divorce proceedings or financial settlement. The court does have the power to order sale of any business owned by you or your spouse, but is generally reluctant to do so. Businesses generally provide an income for you, your spouse and any children you may have together. However, the court may order the sale of a business where one spouse has failed in their obligation to comply with a court order to pay their former spouse a lump sum. An order to sell the business would be a method of enforcement.
Do I need to transfer shares to my former spouse?
It is also uncommon for a court to order the transfer of shares in a limited company, or even any interest in a partnership to a spouse as part of financial settlement in divorce where the spouse had no previous interest in the business. Such an order could have a significant impact on the running and success of the business. In addition, financial settlement is designed to give the parties a clean break from marriage, and the transfer of shares can aggravate post-divorce conflict, and test the parties both personally and financially.
Will my business be valued as part of the divorce process?
Where your business is not treated solely as a means of income for you and your family, it may have capital value and the court may appoint an independent expert accountant to value your business. Business valuation can be difficult, the value really depends on what a buyer would be willing to pay for it so it can be challenging to determine when the business is not actually on the market.
I have a valuable business, but cash flow is poor, how can I pay my spouse a lump sum?
After your business has been valued, the court will consider the liquidity of the business. Basically, the court will determine whether your business is in fact able to raise the cash required to pay your spouse a lump sum as part of the financial settlement process. Rather than paying a lump sum upfront, you could be ordered to pay in instalments or given a sufficient amount of time to raise the funds required to make payment.
The expert valuing your business may also be asked to make an estimate as to how much sustainable income the business might bring, which can assist the courts in determining how much maintenance you should pay to your spouse on an ongoing basis. The court is careful not to include both the capital value of your business and the income generated when assessing how much should be paid to your spouse.
If I started my business before I met my spouse, does this make a difference?
Assets accrued during the marriage will be shared equally between partners. However, where you started and built your business before meeting your spouse, there may be arguments to protect certain elements of your business. This can complicate the valuation of your business and the court will generally only ring fence your business where adequate spousal maintenance can be paid without recourse to the capital value of your business.
Please note, this post was written in collaboration with Family Law Inverness.