Family Law, Divorce, Separation
Divorce from a co-director or business partner
If you are a married couple in business together and are thinking about separating or divorcing you may need specialist legal advice in order to protect your business interests.
During relationship breakdown between co-directors or partners in a business, the status quo should be preserved if at all possible until you decide what you want to do in the future. The first step is to consider how you see the business operating in the future and whether you will both continue to have a role in it. There are a number of questions to be considered:
Can you continue to work together?
If this is at all feasible, can you run the business in the same capacity as you do now, or does your role need to change? You may need to think about how your new roles should be defined; for example you may need a new partnership or shareholder agreement drawn up.
Is it better for one of you to transfer your interest in the business to the other?
Who is most likely to make a success of the business? Can one party afford to buy the other one out and if so, how will it be financed? If you are bought out, will you wish to retain a role in the business?
Is it better to close the business down altogether?
If the business is currently profitable or will be profitable in the future, then closing the business down at this stage is not likely to make commercial sense. It might make more sense for one of you to leave gradually whilst retaining an income or to consider when the best time would be to sell the business on and structure a sale accordingly. Alternatively, you may be close to retirement and that may be a good opportunity to go your separate ways.
Is it better to sell the business to a third party?
You may be able to sell it to somebody independent. This way the maximum value of the business and its assets could be raised and then divided to enable a ‘clean break’ after the divorce. Care will need to be taken that buyers do not perceive a ‘distress sale’ and use this to negotiate down the price.
Can you divide the business into two?
This way two smaller businesses are created. Any property, assets and intellectual property owned by the business will have to be apportioned. You will need to consider how the division should be calculated. Do you want equality of income or equality of capital as they may be different?
Commercial Court or the Family Court?
All of these solutions, and others, are possible but will require co-operation between the two of you. Both of you will need to take a commercial approach to preserving the business as your interests in it will usually be considered to be a matrimonial asset by the court. Any detrimental action or sabotage to the business could be raised in future court proceedings. Even running up extraneous debt in the name of the business through neglect could be held against you. So it is important that the emotional and personal turmoil of your divorce is kept quite separate to the running of the business.
Having decided the way forward, the second step is to ascertain what the business is worth and the valuation of your interests in it. If you have contributed to the business in other ways this should also be taken into account. The judge hearing your application to sort out the finances in your marriage has a wide discretion to balance out any inequalities between you. The judge will consider your interests in the business and what should be done about them if you have not been able to come to an agreement. With advice from your solicitor you can choose which forum to apply to the Commercial Court or the Family Court – or both.
The third step you need to consider is how quickly you need to act. If you think that your spouse may try and hide business assets, withhold the business’s true trading position, divert work elsewhere or exclude you from using company assets, then you may need to apply for an injunction. If you have a defined role in the business as an employee, which you will lose as a result of the divorce, you will need some advice about your employment rights as well and the value of what you may be giving up.
This is a complicated area of the law and sound legal advice at an early stage will help you answer many of these questions and achieve the most equitable outcome.
Valuing a privately owned business on divorce.
Where you or your spouse is a shareholder in a privately owned business it will be necessary to value the business in order to achieve that “fair” settlement. The court will want to know the level of income the company could generate, and what the shareholding is worth.
In order to resolve the financial issues, you and your spouse will need to provide a statement of your financial position. At a preliminary hearing the judge will consider the need for a valuation of the business. If you cannot agree a figure between you, the court may require a valuation from an independent accountant. The accountant will need to be given access to all the information necessary to complete a valuation of the company, or a party’s interest in it, and will answer specific questions asked of them. The method of valuing the business is usually left to the accountant.
There are four main methods of valuing a private company. The first is an earnings based valuation, which examines the future earnings potential of the company. This is the most common valuation approach when valuing an entire company. A price/earnings ratio is applied to an assessment of the maintainable earnings of the company and the accountant will look at comparable companies and ongoing deals with other companies to achieve this. A discount is usually given to minority shareholdings which can often be difficult to realise.
The second method is a dividend based valuation, which looks at the expected future dividends of the company. This method is appropriate for valuing small minority interests although dividends are often difficult to predict.
The third method is the discounted cashflow based valuation. This looks at the company’s anticipated cashflow well into the future and then applies an appropriate discount rate. This method is used when valuing a company in its entirety and when the company’s future cashflow can be estimated with reasonable accuracy.
The fourth basis of a valuation is an asset based valuation. This is particularly appropriate where the value of the company is largely in its fixed assets, such as a farm. This may need the additional input of a surveyor to value the assets and assess their income potential