Divorce & Business

Divorce & Business frequently asked questions

• What will happen to my business if I divorce?
• How is a settlement arrived at?
• What methods can be used to settle the divorce and still protect the business?
• Under what circumstances would the business have to be sold?
• What about the matrimonial home?
• Is my pension protected?

What will happen to my business if I divorce?

Recent case law demonstrates that there is no longer an assumption that a family business will automatically be protected on divorce. Every case is different and many factors have to be taken into account, but a family business will be treated as an asset of the family in the same way as the family home and any other assets.

One of the principles in divorce cases is that the family’s assets should be shared on a basis which reflects the respective contributions of the parties. However, the courts assess that the contribution of the ‘homemaker’ is no less significant than that of the ‘breadwinner’. This means that a spouse is likely to be entitled to a share of the value of the business even if they had no direct involvement with it.

The courts have to decide on an appropriate division of assets and this will be tested against the yardstick of equality, which for most cases will be a 50/50 split.

In the case of Sir Martin Sorrell, the advertising guru, he successfully argued that he had made a ‘stellar’ contribution to the family’s £100m wealth and was awarded 60% of the family’s assets. However, this was very much an exceptional case and if someone so successful gets only 60% of the assets, then most business owners will get less, and certainly won’t get very much more than half.
This does not mean that the business will have to be sold, and where the business is producing sufficient income to support the family (and perhaps meeting the running costs of two households), the courts will be reluctant to enforce a sale as that would cut off the income stream.

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How is a settlement arrived at?

The first step towards agreeing a settlement is for both parties to commit to a full and frank disclosure of their financial circumstances. To enable us to reach a settlement which is fair and reasonable we will need to obtain valuations of all the family assets including property, pensions, investments and the business.

Valuing a business is often the most difficult aspect of this and we will work closely with your accountant to ensure that a fair and meaningful estimate is arrived at for the purposes of the settlement. The accounts of a business cannot by themselves give an accurate picture of its true worth as the values are historical and take no account of how the business is currently trading. The breakdown of the marriage may have had a negative impact on the profitability of the business since the last set of accounts were prepared. We will take this into account along with the business strategy, its future prospects and the prevailing market conditions to arrive at a value which is fair to both parties.

Another factor which has to be taken into account is any likely change in circumstances for either party. This may include employment prospects, children starting or leaving school and also if either spouse intends to remarry or live with a new partner.

Once all this information is gathered the negotiation process gets underway. This is usually done by correspondence between solicitors, with the courts being asked to approve the terms of the agreement so that it becomes a legally binding order. If agreement cannot be reached through a collaborative approach then a court hearing may be necessary. The length and expense of the hearing depends on the complexity of the finances and how many areas are in dispute.

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What methods can be used to settle the divorce and still protect the business?

Various practical solutions are available which should be considered to minimise the impact of a divorce on the business.

• Disposal of other assets – in many businesses there may be substantial liquid assets such as bank accounts or other easily marketable assets such as property or vehicles which can be used to raise funds without damaging the business.

• Transfer of non-business assets – it may also be possible in many cases to transfer to the spouse other assets which fall outside the business itself. A solution might be to give the other spouse a larger share of the joint home, money from a private savings account or an endowment policy, for example, and to offset that against the spouse’s interest in the value of the business.

• Instalments over time – it may be possible for the partner retaining the business to pay a lump sum to the spouse by way of instalments over a limited time. This may be an option where there is scope for the partner to increase the income they receive from the business to make the payments, or to service new borrowing secured on the business to facilitate a lump sum payment.

• Spouse receives net proceeds of sale – a spouse may agree to receive a percentage of the net proceeds of the sale of the business in the future. The disadvantage of this is that the couple are still tied together financially in the interim and many spouses will be reluctant to defer receipt of payment in this way.

• Maintenance – Rather than seeking a clean break a spouse may opt to receive ongoing spousal maintenance. This has the disadvantage that one partner is still reliant on the other, although if the business is sold in the future they could apply to capitalise the maintenance at that stage.

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Under what circumstances would the business have to be sold?

If a suitable alternative to settling the divorce cannot be found, a sale of the business or part of the business may have to be considered. Historically, the courts have tried to shield the family business from sale as part of the divorce settlement, but this all changed in 2001 after a landmark ruling in the case of White v White.

Mr & Mrs White had been married for 33 years and had grown up children. The assets of the case totalled £4.6m, the majority of them being tied up in the family farming business. Mrs White sought an equal share of the farm and other assets, arguing that it was not fair that she should only receive her ‘reasonable needs’ with her husband retaining the majority of the family property. The House of Lords awarded her 40% of the family assets, which resulted in the farming business being sold.

The vulnerability of the business is summed up by the judge’s comments in another case, N v N (2001), who stated that “Those taboos against selling the goose that lays the golden egg have been laid to rest. Nowadays the goose may well have to go to market for sale.” However, it remains the case that wherever possible the courts will strive to avoid this and will not require a business to be sold if there is any other reasonable and practical alternative.

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What about the matrimonial home?

A family’s house is often the most substantial capital asset that they own. In some cases the house may be sold and enough funds made available for both parties to buy new homes. Where there is not enough money, the priority is to provide a home for the children, more often than not with their mother. The courts recognise that it may not be fair to deprive the husband of his share of the capital in the long term and has discretion to make orders as they see fit. This may be to place a deferred charge on the property whereby the husband would receive his share of the value of the house once certain trigger events happen. This may be on the eventual sale of the property, on the ex-wife remarrying or the children becoming independent.

The family home can also be useful in negotiating settlements where one party wants to retain ownership of the family business. By giving up a larger proportion, or all, of their rights over the value of the house it may be possible to retain sole ownership of the business and achieve a clean break.

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Is my pension protected?

On the final decree of divorce, the wife will lose her entitlement to a widow’s pension or death in service benefits from her husband’s employment. The value of a pension is often one of the largest assets that a couple own.

If a husband has a substantial pension provision and the wife does not, the wife may need to be compensated for her loss of rights to the pension. This can be done in a number of ways, from transfer of capital assets or payment of a proportion of the retirement lump sum, to giving the wife maintenance.

Since 2000 it has been possible to divide pensions through a pension sharing order. This enables a wife to transfer out of a husband’s pension scheme a portion of the investment value into a scheme of her own at the time of divorce.

Particular difficulties may arise in the cases of some small private companies which operate a Small Self Administered Scheme (SSAS). These are schemes which provide the director of a private company with a pension fund and at the same time allow the assets of the fund to be invested in or used by the business. Often both spouses will be members of the scheme, and implementing a pension sharing order on a SSAS can be complicated and is likely to require the expert advice of your accountant or an independent pensions adviser.

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Read Neil Dring's newspaper article about Business and Divorce - Article 1

Read Neil Dring's newspaper article about Business and Divorce - Article 2