Divorce and Business Interests: Navigating the Complexities of Splitting Assets
The divorce process can be a complex and emotionally challenging process, but when a business is involved, the stakes become even higher. Whether one or both spouses have ownership in a business, dividing this valuable asset requires careful legal and financial consideration. The division of a business in divorce can impact not only the couple but also employees, partners, other shareholders, and future business operations.
If a business interest has been acquired or developed during the marriage, it is often considered a marital asset. This means that, unless there is a prenuptial or postnuptial agreement specifying otherwise, both spouses may have a claim to a portion of the business. Even if one spouse started the business before the marriage, any increase in its value during the marriage might be subject to a claim from the non-owning spouse.
Before determining how a business will be divided, it should be properly valued by an appropriate expert, and the court expect that this should be on joint instruction of both parties.
Upon receipt of a business valuation, the court has two essential functions in divorce cases involving businesses:
To establish the value of the parties' interests in the business.
To decide how that value should be reflected in the final financial division.
Methods for Dividing a Business Interest
Once a business’s value is determined, the court may decide on one of the following options as appropriate for addressing business division:
Buyout: One spouse buys out the other’s interest, often through an immediate or deferred lump-sum payment or structured instalment plan.
Business continuity and/or division of shares: Both spouses continue to own and operate the business together. This is rare as the courts will wish to effect a ‘clean break’ between parties, but it may be the only option where there are insufficient alternative assets to meet capital needs.
Selling the Business interest: The business interest is sold, and proceeds are divided between the spouses. This is often the most straightforward solution but may not be ideal if the business is a primary source of income and/or if the parties are not the sole owners of the business.
Offset: Instead of dividing the business, one spouse may receive other marital assets (such as property or investments).
Protecting a Business in Divorce
To minimise disruption and potential financial loss, business owners should consider the following protective measures:
Prenuptial or Postnuptial Agreements: Clearly define how the business will be treated in the event of separation, divorce or indeed death.
Shareholder Agreements : If the business has multiple owners, these agreements can include clauses restricting the transfer of ownership shares due to divorce.
Keeping Business and Personal Finances Separate: Mixing business and personal finances can complicate matters and make it more likely that the business will be deemed a marital asset.
Protecting business interests whilst ensuring equitable asset distribution requires careful negotiation and strategic decision-making. By understanding the valuation, division methods, and other legal considerations, divorcing spouses can navigate this difficult transition with greater clarity and confidence.
Dividing a business in a divorce is a challenging and often contentious process, but with the right planning and expert guidance, both parties can reach a fair and equitable resolution. Our Family Law and Corporate & Commercial teams at Caldwell & Robinson Solicitors are well-versed in the complexities of business interests in divorce and are available to offer expert guidance and advice on these matters.
This advice is written by Joanna Burns, Family & Child Law Solicitor.
If you would like to contact Joanna, please click here.