Divorce With A Business Involved23rd Oct 2020
Divorces Involving Companies Are More Complex
Owning a business adds extra complexity and emotional stress to any divorce or civil partnership dissolution.
It brings added financial risks – not just to the director(s) getting divorced but to the business itself…and its other shareholders.
What if your soon-to-be-former spouse wants half the business? What if their demands threaten its very future? You will need expert legal advice.
Minimising The Damage To Your Business
Only the most vengeful or financially short-sighted former partner would want to destroy your company with unreasonable demands (though it’s not unknown).
It is in everyone’s best interests for that business to continue to trade profitably – for you, for them, for other stakeholders. Why kill the goose that lays golden eggs?
No court would approve a doomsday scenario that breaks up the business, destroys your livelihood and denies your former partner and your children financial support. Especially not in these troubled times.
So it’s in both parties’ best interests to reach an agreement as soon as possible. Your company’s other shareholders and your employees will breathe a collective sigh of relief too.
Having a company shareholder agreement in place will go a long way to stabilising the situation. We always recommend them.
How Limited Companies Can Protect Themselves
There are preventative steps you can take to help to protect your limited company:
- keep your partner well away from the business
- don’t give them shares
- don’t make them a director
- don’t use your family home as collateral on business loans.
Many businesses may have already succumbed to one or more of those pitfalls. They may have had little choice – in the real world, you won’t get a large business loan if you don’t provide a guarantee.
How Much Could I Lose?
In any divorce involving a business, there are two key questions that must be answered:
- Should the business be considered a matrimonial asset? It could be.
- If it is a matrimonial asset, what’s it worth?
Valuing a company and determining how much profit it will make in the future is a complicated calculation. It will be based on:
- business assets (two or more years of accounts)
- cash flow forecasts up to five years ahead
- the structure of the business – sole trader, partnership, limited liability partnership, limited company
- comparative analysis of other similar businesses.
Getting an accurate valuation means bringing in a professional. It will be expensive – but there’s no point spending all that money on an expert valuer if your business is barely breaking even.
Yet another reason to reach a sensible agreement quickly – but not hastily.
Dividing Up Business Assets
Even a small firm may have significant assets. Discussions over what needs to be agreed could include:
- commercial premises owned by the company
- machinery, fixtures and fittings of value
- company vehicles (if they are owned rather than leased)
- profits, shareholdings and dividends
- bonuses, pensions and other remuneration.
It is important to stress that:
- the company is likely to be valued as a whole – not split up like a couple’s individual possessions – because it needs to continue to function
- it may not be realistic to reallocate some assets – you can’t march in and seize an employee’s company car simply because it happens to be an asset of the business.
So what happens? There are various options:
- offsetting – you give your partner another asset (or share of an asset) in return for letting you keep your company shareholding
- buy out – in a limited company, one of you could buy out the other
- maintenance – you agree to pay your partner a regular sum from business income (a useful option if the business makes money but has no/few assets)
- you sell the business to them
- you sell the business to a third party, split the money and both walk away.
The typical scenario is that the couple agrees the value of the business – and then one person makes a payment in lieu of the share that they owe. Effectively they are buying the other person out.
But this is not always as straightforward as it sounds:
- What if the director doing the buying out doesn’t have enough cash to do so? They may need a loan.
- What if the other directors don’t want that person to increase their shareholding? What if it creates an uncomfortable majority shareholding that disrupts the delicate balance of power? What if the other directors want to buy in and increase their stakes further?
- What if the director getting divorced goes out of their way to downgrade the profit outlook? What if they suddenly need to spend thousands of pounds on ‘essential’ business equipment (destroying company profits at the very point of divorce?) There are various ways to counter this, notably looking at profits from previous years.
What Impact Will Coronavirus And Recession Have On The Settlement?
Rising unemployment and economic uncertainty due to Covid-19 are making it harder for divorcing couples to agree on valuations when dividing up assets.
Some company owners getting divorced have been quick to point out how the pandemic has plunged their otherwise profitable business into the red. They say their business will be worth significantly less for the foreseeable future.
Some people have cut or reduced maintenance payments because they have been made redundant, been forced to take pay cuts or been placed on furlough. Others cite the threat of a no-deal Brexit as an excuse to pay less money to their former partner.
Their lawyers may try to argue that Covid-19 is a ‘Barder Event’ – something so unexpected that it enables existing court orders to be appealed.
That might have worked in the very early days of the coronavirus pandemic.
But with every passing day, a Barder Event application becomes less likely to succeed because Covid-19 restrictions are now – sadly – the new ‘normal’.
Get Expert Advice On Family And Commercial Law
By now it will have become obvious that shielding a business from the impact of a director’s divorce requires a law firm with extensive expertise and experience in both family and commercial law.
Contact Coles Miller Partner Richard Perrins, Head of the Family Department for more information about divorce and dissolution of civil partnerships.
Contact Coles Miller Managing Partner Neil Andrews, Head of the Commercial Department for more information about business disputes and litigation.