Whether you have built a company from scratch, inherited a family business, own shares in a successful business or operate through a partnership or LLP, divorce can create uncertainty about one of your most valuable assets.
Many people fear they will be forced to sell their business or lose control of something they have spent years building. Equally, spouses who have supported the business throughout the marriage are often concerned about receiving a fair share of its value.
In reality, business assets are rarely dealt with in isolation. They form part of the overall financial settlement alongside the family home, pensions, investments, savings and other assets. The challenge is achieving a fair outcome while preserving the value of the business wherever possible.
At Taylor Rose, our family lawyers regularly advise business owners, professionals, shareholders and their spouses on financial settlements involving businesses of all sizes. We work closely with accountants, valuers and other professionals where necessary to help clients protect their commercial interests while achieving a fair financial settlement.
Does Divorce Mean My Business Will Be Divided?
The Family Court's objective is not to interfere unnecessarily with a successful business. Instead, it seeks to achieve a fair overall financial settlement, taking into account all of the parties' assets and financial needs.
That often means the business owner retains the business while the other spouse receives a larger share of other assets.
Every case depends on its own facts, but preserving the business is often in everyone's interests. Unlike a house or an investment portfolio, an owner-managed business is often much more than a financial asset. It may also represent the family's principal source of income and future earning capacity.
For this reason, dealing with business assets requires a different approach from dealing with other matrimonial assets. A settlement that appears fair on paper may have serious commercial consequences if it undermines the viability of the business itself.
In practice, many business-owner clients come to us convinced that the court will force a sale of the business or hand a shareholding to their spouse, and the first conversation is often about dispelling that fear and refocusing on how the business fits into the wider settlement. Where the business is the family's principal source of income, we find that preserving its ability to trade is almost always at the front of the court's mind too.
Valuing a Business Is Rarely Straightforward
One of the most significant areas of dispute is often the value of the business itself.
Unlike publicly listed companies, there is usually no readily available market price for an owner-managed business.
Instead, valuation often requires specialist accountancy evidence and careful consideration of how the business actually operates.
Factors that commonly influence valuation include:
The nature of the business and, often crucially, the importance of input from the owners (which may well change if the divorcing owner feels less motivated);
Recent financial performance, including recurring income, retained profits and long-term contracts;
Assets of the business that can be valued with some degree of certainty, such as property or intellectual property;
The attitude and approach of all shareholders to the prospect of any change in the business consequent on divorce.
Many owner-managed businesses involve other shareholders, directors or family members. Their interests may also need to be considered. For example:
Shareholder agreements may restrict transfers;
Articles of Association may contain pre-emption rights;
Lenders may require approval before ownership changes;
Investors may have contractual protections; and
Transferring shares may have unintended commercial consequences.
Two experts may legitimately reach different conclusions because they have adopted different assumptions about the business's future performance.
In our experience, agreeing the underlying assumptions with the other side at the outset, ideally through a single joint expert, tends to avoid much of the cost and delay that a battle of the experts produces.
Goodwill Can Be One of the Most Difficult Issues
In many owner-managed businesses, a significant proportion of the value lies in goodwill, which can take different forms. For example, a business may derive value from:
In many small businesses, goodwill is closely linked to the owner's personal expertise and reputation. Where a business depends heavily upon the continued involvement of one individual, that may affect both its value and the options available when negotiating a settlement.
Understanding the nature of the goodwill is therefore often a key part of the valuation exercise.
More often than not, in owner-managed consultancies and professional-services firms a significant portion of the value walks out of the door with the founder, and the court will usually accept a meaningful discount to reflect that.
Business valuation vs available cash
A business may be highly valuable while having relatively little cash available for immediate distribution. Its value may be tied up in machinery, stock, contracts and property.
This means that even where a business has substantial value, forcing immediate payments or requiring capital to be extracted too quickly may not be commercially realistic.
Understanding this distinction is often central to achieving a practical financial settlement.
It is not unusual for us to advise on cases where a business has a healthy balance-sheet valuation but simply cannot support an immediate lump-sum payment without harming its trading position. In those cases, you can typically look to structure a phased buy-out over an agreed period, calibrated to a percentage of distributable profits or free cash flow.
Tax Can Significantly Affect Value
The headline value of a business is only part of the picture. The tax consequences of transferring shares, extracting capital, selling assets or restructuring ownership can materially affect the amount each party ultimately receives. Early consideration of tax issues may open up solutions that are considerably more efficient than those based solely on headline valuations.
Time and again, we see settlements agreed in principle only to unravel when the tax consequences are worked through late in the day. We would seek to involve a tax adviser as soon as it becomes clear that the settlement will involve share transfers, dividend extraction or a future sale. In addition, having in mind the tax-year timing of any transfer between spouses, can make the difference between a neutral disposal and a significant charge to capital gains tax.
Creative Solutions Can Avoid Unnecessary Disruption
There is rarely only one way to achieve a fair financial settlement. One of the most common solutions is for the business owner to retain the business while the other spouse receives a greater share of other assets.
Where that is not agreed or possible, and an immediate buy-out payment would place unnecessary strain on the business, it may be possible to structure capital payments over an agreed period.
This can sometimes allow the business to continue trading normally while still achieving a fair financial outcome.
We frequently see settlements built around offsetting, for example one spouse retaining the shareholding in return for the other taking a larger share of pensions and property, or a deferred capital sum tied to a future exit event.
Why Early Specialist Advice Matters
Business owners often seek advice only after financial negotiations have become difficult or positions have become entrenched.
In reality, obtaining specialist advice at an early stage can make a significant difference.
Understanding the likely value of the business, identifying potential areas of dispute and developing an appropriate negotiation strategy from the outset can help avoid unnecessary costs and reduce the risk of commercial disruption.
Early advice may also assist where there are concerns about proposed business transactions, changes to ownership, restructuring, succession planning or the extraction of funds during the divorce process.
Experience tells us that much of the avoidable difficulty in these cases stems from steps taken, or missed, before specialist advice is sought: an ill-timed dividend, a share transfer to a family member, a restructuring or a change in remuneration that later has to be explained to the court. Where clients come to us early we can plan around these issues; where they come to us late, a disproportionate amount of time and cost tends to be spent unpicking them.
How Taylor Rose Can Help
Our family law solicitors regularly advise business owners, directors, shareholders, professionals and their spouses on financial settlements involving owner-managed businesses.
Depending on your circumstances, we can assist with:
advising on how business assets are likely to be treated during divorce;
working alongside accountants, forensic accountants and independent valuation experts;
identifying valuation issues at an early stage;
negotiating settlements that protect the ongoing operation of the business;
exploring offsetting and other practical settlement options;
resolving disputes through negotiation, mediation or court proceedings where necessary.
Whether you own a long-established family business, a growing company or hold shares in a successful business, we will work to achieve the best possible outcome while protecting your wider commercial interests.
