Businesses in Divorce
Businesses in divorce.
Businesses raise particularly difficult questions in divorce. If you, or your husband or wife has a business you should definitely get special advice about your own situation.
Once you have had your own advice, hopefully you will be able to reach some kind of agreement between yourselves, but you will want to understand how a judge would approach the business, if the case came before the court.
A judge will almost invariably expect the value of business to be taken into account in reaching a fair settlement overall, so it is likely to have to be valued. Large companies trading as PLCs are relatively easy to value because their shares have a quoted price, but smaller companies and partnerships are much harder to value. In practice an independent forensic accountant will be commissioned by the parties’ solicitors to do this, at a cost of several thousand pounds.
There is no substitute for individual advice about your situation if you face these issues.
Although they are called ‘forensic’ accountants they don’t go through the business with a tooth comb looking for things which might be out of place. The accountant will look at the business fairly briefly then focus on its accounts. Essentially the accountant is tasked to say what price the business would sell at on the open market. How s/he approaches that will vary according to the type of business but generally, s/he will determine a figure for the ‘sustainable’ annual profit based on previous years’ trading then multiply it by a few years to reach an opinion about what price the business should achieve if it were sold.
If the party only owns a proportion of the business – say 25% of the shares in a limited company – then of course the value is reduced proportionately. With smaller shareholdings the forensic accountant will often apply a further discount to reflect the fact that the shareholding does not carry full control of the company.
The outcome of this process is often quite contentious, there is much scope for argument and some scope to challenge the forensic accountant’s report, but at the end of the day the judge is likely to accept her/his opinion. The accountant will also explain what tax would have to be paid if the business were sold, to reach a fair net value for the purpose of these discussions.
Once the net value has been established the judge has to decide how the net value of the business should be taken into account in dividing everything up. Normally s/he would prefer not to see the business sold, but it may be difficult for the party who is keeping the business to raise money to compensate the other party for its value. This is known as the “liquidity” issue, and it can result in a lower figure or time to pay.
There is no substitute for getting proper advice from an expert family solicitor if your situation involves a business.