When looking at an overall division of finances on divorce, the first step is to understand what resources there are. One of the issues faced by separating couples is how and when a business owned by either of them comes into play. We at CFLP are experts in assessing the importance of business interests on divorce. Working out how much a business is worth, if it is worth anything at all, can be especially challenging for those who are not involved in running the business.
First and foremost, it is crucial to understand the nature of the business. Is it:
- An asset owning business? Examples include companies which own a property portfolio – in this case the value of the business will be closely linked to the underlying property portfolio.
- A trading business? This will usually involve a business selling goods or services, and so may also own assets.
- An income stream business?
If there’s one partner who’s not been involved in the business he or she may find it very difficult to know whether the business has any value at all. Where one partner is involved in running the business, he or she may find it very frustrating that the other does not understand the risks, challenges and uncertainty faced. We at CFLP advise and assist either party. We ‘get under the bonnet’ of what the business does, to assess with you the likelihood of the business having a value beyond the income it produces.
To assess the business, we need to consider:
- What does the business do and/or what does it own?
- If it is a trading business, who are the clients? Are they small one-off contracts, or big rolling contracts spanning years of trade?
- What are the highs and lows of the business? Do the accounts show consistent good years, or up and down good and bad years?
- What level of profit does the business produce and how is it extracted by the business owner?
- Is the business in ‘investment mode’ or saving to expand?
- How has the business grown throughout the marriage? How was the business set up, when was it acquired, and how has it developed during the marriage?
- What involvement does the spouse have? Are they a sole 100% shareholder, or do they have a minor shareholding? What level of control do they exercise over the business?
If the business is more than just an income stream, it may be necessary for the business to be valued by an expert. This will usually mean involving a forensic accountant to assist in ascertaining the underlying value of the business, what level of maintainable future income it can produce for the owning-spouse, and what level of value can be extracted from the business to fund a settlement, if appropriate.
How do we approach these issues?
The choice of process is individual to the circumstances of a particular case. We find that collaborative law is a very useful process where marriage and business interests are mixed. The meetings allow the introduction of experts to assist the lawyers and clients understand the business and the issues it faces. The expert can work directly with all involved and advise neutrally. It is more difficult to make this introduction to a mediation model, as often the involvement of a lawyer is required to instruct the expert and ask the expert the right questions to understand the business.
The court process is structured and there are rules about the introduction of expert evidence. The court’s limited tools can be blunt instruments which may not be suitable for assessing certain businesses – for example a court will rarely order an audit of the business accounts, instead relying on those produced by the accountants. This can create issues in some cases where the partner not involved in the business challenges the veracity of the accounts.
Whichever approach is adopted, understanding a business and how it should be factored into overall settlement is important. If you’d like to talk about the different ways a business is valued on divorce, please do give Tricia, Simon, Sue, Adam or Gail a call on 01223 443333.