Valuing your business
Divorce can have a highly destructive impact on a business. In the short term, particularly if only one spouse is involved in the business, it can have a damaging effect on the business’ performance, due to the trauma of divorce and the time spent diverted from working. In the long term, unless satisfactory arrangements are agreed, the financial consequences can be quite damaging to all parties. It is therefore essential that, at an early stage, all parties try to work to preserve the value and the potential of business interests.
For the entrepreneur who has built a business, the prospect of losing it to divorce can be devastating. However, in reality, it is rare indeed for the Courts to order a sale, rather they take a practical view that the business is probably the main source of income which needs to be protected, with the value being taken into account in arriving at an overall settlement which may, for example, result in the matrimonial home going to one party and the shares in a business being retained by the other.
It may be that a family business is owned 50:50 by the husband and wife (which is not uncommon as it can be particularly beneficial for tax purposes) but unless both spouses are genuinely working in the business together, it is essential for the spouse working in and driving the business to take early steps to protect it. The following key considerations may be helpful:
- Take a sensible and pragmatic view of the value early on, in order to avoid cost escalation.
- Get control of the situation with your lawyer at an early stage rather than reacting to the demands of the Court or your spouse. This does not mean moving shares or assets in order to avoid your obligations as that could greatly damage your case further down the line – and remember the Courts can set such actions aside.
- You will know better than anyone why it is important for all involved in the business to be protected and will have a good idea of its value, so offer voluntary information at an early stage rather than waiting for it to be extracted by your spouse’s lawyer or the Court.
- Obtain early advice relative to your share in the business. The Courts will take a very different view of a 100% owned business from one which has a number of other shareholders or business partners.
- Pay particular attention to the consequences of business assets that have become muddled with personal assets, for example, where a house is used as security for borrowing by the business.
- Consider carefully the main financial benefits from the business. For example it makes a difference as to whether the business is heavy on capital but light on income (e.g. a farming business) rather than a business that is light on capital but heavy on income (e.g. an insurance brokerage). Remember that the Courts will take a close look as to whether there are any assets that can be sold without harming the business, rather than a business which has little capital that can be realised but significant income that can be generated.
If you would like to discuss the valuation of business interests, or a client’s if you are a professional advisor, please call Malcolm Coomber on 020 8652 2450 or email firstname.lastname@example.org