Implications of divorce

NICOLA FURMSTON of solicitors firm Barker Gotelee examines how business assets may be divided in the event of a divorce

ASSETS up for division between a husband and wife on divorce often include the value in a business.

A decade ago, business owners facing divorce could rest assured that in most circumstances a court would not order the sale of a business to meet the settlement requirements of the other spouse.

However, that has changed and courts are now more ready to order the sale of a business to release capital and achieve fairness between husband and wife.

Contemplating the sale of a lovingly nurtured business can be an unnerving prospect, not only for those running businesses, but also for employees. Valuable employees may be lost to other, seemingly more secure, employment, if sufficient reassurance is not given to them about the business’s future. This can have a serious knock-on effect on the value realised on sale.

Fortunately, a sale of a business is likely only as a last resort. Often fairness between spouses can be achieved by the non-owning spouse taking other assets or the business owner raising cash to buy-out an interest in the business. The latter depends upon the business owner’s ability to raise funds from the business.

For companies this might involve taking additional remuneration, including benefits, bonuses and dividends; drawing on a director’s loan account; purchase of shares by other shareholders or borrowing, although if the business owner has a minority shareholding this may complicate matters. If the business is run as a partnership it may be possible to draw on a partner’s capital or current account.

Where there is limited ability to raise immediate funds to effect a buy-out or insufficient access to other liquid assets, further options to sale may still be available. A business owner may be ordered to pay a future lump sum, perhaps with a charge against his/her shares in favour of the spouse to secure payment.

Occasionally a court will defer a decision about a business to see how it performs in the future. Rarely, husband and wife owners will agree to continue in business together.

Whichever method is adopted by the court to achieve a fair settlement between the parties it will require a valuation of the business before making its decision.

This will usually be prepared by an accountant using one of three traditional approaches and can be time-consuming and costly, so having the following documents to hand will help to speed the process and keep costs down:

n The statutory financial statements filed at Companies House;

n The Memorandum and Articles of Association;

n The annual returns; and

n Any shareholder’s agreement.