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Limited companies and divorce

Clients often ask whether there is a need to have any sole or shared business valued in the event of a divorce or separation.

To answer this, people need to understand that the court can consider a business as one of the financial resources available in a case, irrespective of whether the business is considered a matrimonial or non-matrimonial resource.

  • Divorce with a business involved (UK)

    If a business valuation is needed, it will usually be undertaken by a single joint expert acting on behalf of both parties in a divorce case. However, before instructing an expert, certain steps should be taken.

    There should be consideration of full business accounts for the last two financial years, which applies to sole traders as much as it does to partnerships, LLP’s, or shareholders in limited companies. 

    If a business is incorporated, abbreviated accounts can often be accessed online from Companies House. This contains easily accessible information that either party can review digitally at the touch of a button.

    Whilst a useful overview, these are no replacement for full company accounts, which are usually much more informative and should include the full profit and loss account, balance sheet, detailed notes to the accounts, and reports on behalf of the accountants and directors. 

    This information gives more context to the performance of a business than publicly accessible abbreviated accounts. Unsurprisingly, abbreviated accounts tend to be more concise and might only tell part of the story. 

    A word of caution, it is worth bearing in mind that by the time business accounts or financial statements are available, the data may be historic and could be out of date. It is worth cross-checking this information against more current management accounts. This can help give both parties more confidence in a valuation and make more informed decisions without instructing an expert.  

    Additionally, it may be wise to obtain a letter from your accountant to comment upon its value, which can assist in narrowing the issues in dispute.

     This can help, although the flip side is that the spouse may be wary about relying on a company accountant’s valuation unless there is corroborating evidence from a single joint expert. However, it can help to explain how the valuation of the client’s interest in the business has been assessed.

  • Business valuation in court

    In most cases, after taking the above steps, it is possible for an agreement on valuation to be reached. However, where this is impossible, the court may expect expert evidence to be considered from a single joint expert instructed by both parties. 

    The question for the court is whether it is necessary to instruct an expert. If the court is satisfied that an expert should be instructed, common practice is instructing an independent accountant with no prior knowledge of the company. Although it would be expected that they should have sufficient knowledge of the market or sector in which the business operates.

    Strictly speaking, there is no mandatory requirement for the court’s permission to be obtained before an expert is instructed. However, permission is needed before expert evidence can be put before the court. 

    If there is a dispute about instructing an expert, this should be addressed early in a court timetable and ideally no later than the first hearing. The court will weigh up the cost and delay of instructing an expert against the potential value of a party’s interest in the business and the relevance in the context of the other matrimonial assets available. 

    The scope of an expert’s instruction should be carefully considered. It could include the value of a spouse’s interest in a business, the extent to which this value is realisable (i.e. liquidity), the future maintainable income of the business, and any tax consequences associated with a sale or disposition. 

    Bear in mind that the value of a business should be treated with caution, and it is not realistic to compare a business valuation to property or other matrimonial assets. 

    Property is generally easier to value, sell and convert to liquid capital and more readily realisable. 

    Business valuations are generally more uncertain; there is greater potential for change. They are typically regarded as more risk-laden. The sale of a business might affect a party’s earning capacity or future income, unlike the sale of a property.

  • What does a judge consider when dividing a family business?

    There are several factors that the judge will consider relevant in your case. These will affect the judge’s decision. They include:

    • The share that each partner has in the business. If the business was founded before the marriage and is entirely owned by one partner, the judge will likely avoid dividing the business or otherwise interfering with it.
    • Which one of the divorcing partners has more to do with the day-to-day running of the business?
    • Is it possible to find credit borrowed against the business or extract capital from the business easily?

    Talk with a family lawyer to learn more about your options and possible outcomes should your divorce end up in court.

How can a court divide a family business in a divorce settlement?

Courts possess several powers with regards to dividing a family business between divorcing partners. Depending on what they decide, they may:

  • Compensate one partner with a lump sum, with a set amount of maintenance, or both. Courts are firm but fair: they prefer not to needlessly divide a business where possible. Instead, they will compensate the non-owning partner. 
  • The divorcing partners are made shareholders. 
  • The business is sold, or shares are sold, with the opportunity available for the business-owning spouse to buy back any shares from their partner should they wish to.
  • Shares are transferred directly from one spouse to another by order of the court.

As such, if you are a limited company director, divorce could affect your business in one of many ways. Consult with a family solicitor to learn more.

The overall divorce settlement

Given this, clients should bear in mind that it can be misleading to treat a spouse’s interest in a business as a capital asset in isolation. 

Sometimes, it makes more sense to consider the income a spouse can draw from a business, which can be relevant when considering maintenance as this could be reduced if a client was forced to sell their interest in a business to realise its capital value. 

It is clear that there is no one-size-fits-all approach, and each case will be based on its facts. 

Sometimes a valuation from a single joint expert can help, but often parties can jump to this starting point without first taking sensible and proportionate steps to consider whether this is necessary.

Contact Stowe Family Law today

Still looking for a ‘family law solicitor near me’? Look no further.

If you are separating from your partner and either you or your spouse hold an interest in a business, it is important to take early advice tailored to your specific circumstances.

Our local family lawyers work with our in-house forensic accountants and have extensive experience in high-net-worth divorces; divorces where one or both partners are directors; and other business structures.

Call us at 0330 056 3171, fill in our contact form, or learn more about us today!

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