Separating business interests on divorce or separation

Who has the money?

There are broadly three alternatives:

  • you both have financial assets, including cash, which you control personally and separately;
  • one of you has most of the financial assets, which they control personally and separately;
  • you are in business together in some way and you both have control over the same assets.

Any source of income could also be regarded as a relevant business asset. However, here we are talking about assets over which one of you has some control.

Just disclose everything

If you are the partner with the money than the most important advice we can give is that you should disclose absolutely everything upfront. If circumstances change after that disclosure then you should update it.

If you fail to give full disclosure and your case goes to court, the Court will come down on you very heavily. Furthermore you will have given your ex-partner a stick to hit you with at every turn. Even if he/she is too kind to take unreasonable advantage, her solicitor will have no such qualm.

If you are not the partner with the money, you may have taken little interest in your ex-partner’s business affairs or there may be virtually nothing you don’t know about. Either way you need to find out and take account of what your ex-partner discloses.

Taking account

If you are or were either married or in a civil partnership then separating out joint business interests will be subject in the first instance to family law – that is the body of law relating to divorce, separation and family matters.

If you are separating and you have not been married or in a civil partnership then separating out joint business affairs will be based on corporate or partnership or other business law.

A party in divorce or separation rarely takes full account of the value of business assets owned by the other of them. They usually constitute both a capital asset with a cash value and a source of income.

If your financial settlement were to come to court the judge would require professional valuations and would order appropriate transfers of a lump sum which took these valuations into account.

If you were to end up arguing about your financial affairs before a judge, the critical document would be a “Form D81”. Some mediators have their own abbreviated version of this form which will cover the same topics.

Using it is a good way to isolate the matters in dispute and to conclude your mediation knowing that you have covered the most obvious areas.

Sole practice or sole trade

The simplest business asset is a sole trade or sole practice. That means one person is entitled to all of the profit in a simple business. That could be a plumber, a computer coder, an architect or a hairdresser.

That business does not have assets of its own. Everything, from the intellectual property and the customer list to the last piece of carpet in the meeting room, is owned by that trader or practitioner.

It is comparatively simple to value a sole trader’s physical stock. Physical goods can be counted. Some intangible assets such as debts due can be calculated easily. Others, like a list of clients and customers, the value of other goodwill and intellectual property like copyright, ideas or systems or processes, can only be given a range of values because there are so many uncertainties about the future.

The value which the court would place on the business of the sole trader is generally quite low. The reason is that the business exists only because the owner works in it. If the income earned by the owner is to be taken into account in the divorce settlement then clearly, little or no account should be taken of the capital asset which that person must continue to own, to be able to generate that income.

A sole trade or sole practice is therefore important in connection with the division of business assets only if, to some extent, an asset could be worth more than it is presently generating in income. As a result, the court will often ignore the value of a sole trader or practice entirely.

A share in a partnership

The partnership in which only one of you has a share is treated in a similar way to a sole trade. The only relevant difference is that partnership assets are likely to be jointly owned by all of the partners, although that may not be the case for every single asset.

The value of the partnership share should be explored through the partnership agreement and the last partnership accounts. A share which provides a high level of control will be worth more than that of a junior partner whose control of the business is minimal.

Whatever the value of the partnership share that can be deduced from the agreement, it is also important to consider the provisions for controlling any transfer of an interest in the partnership.

If the partnership controls a business with substantial assets – whether physical or in, say, intellectual property, then some account must be taken of the proportionate value of those assets owned by you or your ex-partner.

If on the other hand he or she is simply a member of a professional partnership with no substantial assets, but it is usual to treat the partnership earnings likely earnings from employment without an attempt to calculate today’s value of what might happen in the uncertain world of tomorrow.

Partners together

When you have worked together as partners in business as well as in life, separation of business interest can be complicated. A third party valuation is not particularly useful because it depends on the extent to which the business is dependent on one or both of you.

A formal valuation is likely to be based on what a third party might pay if the business was for sale. However, if the two of you working it together and have probably built it up over a number of years then it is unlikely that you will agree to sell it.

Suppose for example that a hairdressing business produces an income of £60,000 a year for each of you. The assets you have accumulated for the purpose of earning that income are likely to be of comparatively low value compared with what you can earn.

By far the most valuable asset in that business is the goodwill consisting in the willingness of returning customers to continue to pay for a hairdressing service provided by you and your staff from your existing premises.

Assuming you would not be able to replace your income out of some reinvestment if you sold the business, that leaves you two options. Either you stay together in the business or one of you buys the other out. It follows that before there is any serious consideration of value you need to decide together how you will deal with the business in the future.

Because that business depends entirely on the two of you its value without you is very low indeed. It follows that any formal valuation is irrelevant. The real value is what one of you would be prepared to pay the other if you had the money available and your offer was acceptable. That has to be the starting point. From there you must negotiate.

The difficulty arising from the hairdressing partnership situation is typical of a dispute which cannot properly be resolved by the court system but can most certainly be resolved by mediation.

A limited liability partnership

Limited liability partnership has enough status as a legal person to make it into an owner of assets in its own right. Subject to accounting for those assets in the same proportion as you own a partnership share, the principles to be applied at the time of divorce or separation are broadly the same as those arising in a partnership.

The most significant consideration is the partnership agreement

Partners in business but no longer partners in life

If you are separating without having married or entered a civil partnership, you have no legal right to make a claim on your former partner for money or a share of any business interest of his/hers. Instead, you must rely on the common law or company law to separate your interests.

Much depends on the structure of the business, your different roles and the extent of your respective involvement. If you have a jointly owned company then it is likely that it will provide a structure, and possibly a shareholders agreement, which sets out clearly what should happen if either of you should wish to sell shares or otherwise abandon involvement in the company.

If on the other hand, you have simply set up business together without any formal arrangement it is more difficult for one of you to leave the enterprise if the other insists on keeping his share. If you’ve lived together as a couple without marrying or entering a civil partnership, you don’t have an automatic right to make a claim on your ex-partner for a share of any business interest once you separate.

If you have run your business together and/or put money in it together then it may be possible to structure a viable claim which would be supported by the court. As with any litigation, it will be very expensive.

Further help on this and other financial matters is available at Money Advice Service.

A private limited company

The value of shares in a private limited company depends, first, on the proportion of the total number owned by you or your ex-partner.

If you are less than, say, 25% then the value is likely to be circumscribed by articles of association, a shareholders agreement and, if you are an employee, your contract of employment.

Although there is no fixed procedure for valuing the shares in a small private company, several different valuation bases have become to some extent standardised. The main considerations are:

  • Value to the shareholders as an income source and capital asset

The shareholders own the company. Ultimately, they have absolute power. They allow it to be run in the way that it is run, whether or not some or all of them are also directors. Even if the company is not particularly profitable it is likely that the shareholders will wish to continue to operate as they do. A judge would take this asset as he finds it and will not adjust a valuation to take account of what might be, rather than what is now.

  • Net asset value

A company whose main assets are land and buildings is most likely to be valued by reference to those assets in preference to any other possible measure.

  • Market value as a going concern

This is a difficult one. Whether or not the business is incorporated as a company, is a minefield far beyond anything with which the court would want to be involved. It boils down to a question of what any third party might be willing to pay for the business. That third party might be looking for a super bargain basement price or he/she might regard your business is the perfect add-on for their own.

If your business is similar to many others, then you might be able to value it by reference to asking prices for comparable businesses.

  • Value to a buyer

A prospective buyer of a limited company will have made his or her own calculations as to what it is worth. The figures an accountant would put forward is usually a starting point. He or she will move beyond that to assess what could be done with the business to increase the profit, for example:

  • obligations to employees in the event of any structural change
  • the tax effects of any change that might be proposed
  • the risk to future business of the change which may affect trading
  • cash flow, if the proposal includes reducing the amount of money required for trading
  • using different classes of shares
  • making appropriate arrangements through a new shareholders’ agreement
  • controlling a director’s freedom to change things through his contract of employment, or
  • options to buy or sell shares in different circumstances
  • a contract whereby a departing director (one of you two) continues to provide occasional services to the company as a consultant

What if you go to court?

If your ex-partner refuses to provide enough information for you to be able to instruct your own accountant to talk to about a valuation then you really have no alternative than to apply to the court for an order for production of accounts and detailed information.

It is certain that a judge will severely penalise the party who intentionally fails to produce information of any sort. Openness and transparency are essential to all processes in family law.

It is likely that the judge will accept the report and valuation by a qualified accountant. It is not part of the judges task to question the report in any detail nor to decide how you should conduct your life. He is interested only in the value.

The order he makes is unlikely to take account of how the business is run or how it could be sold or broken up.

Mediation is so much better

Mediation just has to be the best route to solving problems relating to your business affairs. Family law and the family law courts are simply not set up to deal with business issues. That means going to court is expensive and tedious and you may end up with a strangely unexpected outcome which will leave neither of you happy.

In contrast, mediation opens up a large number of options which are simply not available to a judge. It provides opportunities to consider alternative arrangements whereby your business lives become independent of each other without prejudicing the ongoing value of the business and without either of you feeling that you have lost out.

As a result a mediated settlement is likely to produce both better financial value and a more satisfactory and convenient outcome than the formal court process.

Of course, you need a mediator with solid business experience.