Divorce is never straightforward—but when a married couple also runs a business together, things can quickly become more complicated.
In this article, Lisa Payne, Associate, and Madeline Scott, Paralegal, in the Family Law Team at Wilsons Solicitors LLP, outline the main considerations SME business owners should keep in mind before starting divorce proceedings.
There were approximately 5.491 million SME’s currently operating in the UK as of 2024 according to gov.uk (Business population estimates for the UK and regions 2024: statistical release – GOV.UK). Those statistics, paired with the current divorce rates, is likely to transpose into a high proportion of SME owners finding themselves facing divorce.
Before filing for divorce, separated SME business owners should carefully consider several financial and logistical factors related to their business to set themselves up in the best way possible. There will be many moving parts, and early advice is essential before any decisions are made.
Not only does a SME business owner need to consider the fiscal aspect of the business, they need to consider the impact, if any, on their employees, and quite possibly their spouse’s involvement in the business if they are a member or employee, and the family’s finances as a whole. This can be quite the balancing act.
Identifying and quantifying business assets
Resolving the financial issues on divorce requires both parties to provide full frank and continuing disclosure in relation to all financial assets, which includes business interests.
The first step is to provide disclosure in relation to an SME – the last 2 years’ worth of accounts, possibly more, the management accounts, etc. The second, is often to then appoint an expert to report on various aspects of the business, but predominantly to ascertain the value of the owner’s share.
It is common for the parties to have differing views of the value of a business and their spouse’s share, and so to avoid protracted solicitor negotiations, it is sensible to agree that an expert provides a report, or a court can appoint an expert.
The expert referred to is a single joint expert, as they will take instructions from the parties on a joint basis and be independent. However, ultimately, they are an expert of the court and not the parties themselves. The impartial report aids negotiations and any resulting settlement. Parties will be able to ask questions of the expert following their report if anything is in dispute or needs clarification. The expert may be ordered to provide evidence at court and be cross-examined by the parties’ Counsel, so it is important you choose your expert wisely, and your Counsel for that matter.
A comprehensive report should address liquidity issues and explore tax-efficient methods for extracting funds, such as dividends, bonuses, share buybacks, or borrowing. It would also normally address the business’s ability to generate future income, which could be used for ongoing financial obligations such as maintenance, or for mortgage capacity to rehouse.
There are different valuation methods which may or may not be appropriate depending on the type of business being dealt with e.g. net-asset, capitalised earnings, discounted cash flow, EBITDA, future maintainable earnings, etc.
Obtaining a steer from the business’s accountant can be invaluable due to their working knowledge of the business, however there may be concerns about impartiality. They may also be helpful in obtaining disclosure and further narrative in relation to business interests.
One of the many issues to consider is the risk of ‘double counting’ and the court has to grapple with whether a business has a capital value, or is purely an income-generating asset, or both.
Whilst the business value is an asset that forms part of the matrimonial pot it is not a readily available liquid asset and this is something that must be taken into account. A common method is offsetting company value with other assets in the pot – you keep the business but your spouse receives a greater portion of the family home, or a second property transferred to them.
That being said, the courts make the distinction between ‘Cooper bottomed assets’ such as property or cash savings and ‘risk laden assets’ such as shares in a business. In a case where this was addressed, the Court of Appeal held there must be an equal division of both and therefore the courts may not approve a settlement whereby one party retains all business assets if they are left with little or none of the liquid assets.
In some cases, it may be preferable to structure a settlement that allows for sharing future income and value rather than forcing a sale that could ultimately destroy the business and therefore the income it provides for the parties and the family.
Corporate structures can be complex and there are the other members of the business to consider, the articles, the voting rights etc. It may not be possible for shares to be transferred to a spouse, given the views of other members. This is why early advice from family lawyers, accountants, tax planners etc is essential. It would also be sensible to consider advice from employment and corporate lawyers.
The chronology in relation to the business is another important factor to consider because a business may be deemed ‘non-matrimonial’ if it were created and built-up prior to marriage. However, even if it is, if it is the sole income stream in the marriage, and especially if there are young children to consider, the timing of set up and the background may have minimal impact. The Family Court’s priority is to house the children of the family and to ensure all parties’ needs are met, not to save the business.
Day-to-day running of the business during negotiations
It is important for the SME owner to prioritise personal wellbeing to mitigate any negativity on divorce that may flow into business operations. Having a united front if both parties are members will play an important part in keeping up staff morale.
It is also important to ensure the owner has a strong support network and know where to seek out support if required be it through counselling, using a divorce coach or other means. Not only are they dealing with the impact of divorce, but the future of their business and all that entails.
The courts are alive to the performance of the business and there are many cases where it is presented by the owner that the business is failing and so it has little or no value. If this argument is to be ran, it must be supported by strong evidence. Any manipulation of the business’s value to influence the settlement will be addressed by their spouse and the court.
Tax
The owner will want to be aware of any tax implications as soon as possible. All tax consequences must be carefully reviewed by someone with the relevant expertise at the earliest possibility.
Non-Court Dispute Resolution and how this can help SME owners on divorce
Best practice and guidance is to attempt to settle cases outside of the court system to conserve the parties’ legal fees, and reduce the time taken to reach an agreement given the backlog of cases in the family courts. The longer it takes to reach overall agreement on divorce, the more likely the business will be impacted.
Further, the press can now report on decisions made by the Family Court and reputational damage to the business and the SME owner should be carefully considered before court proceedings commence.
Your family lawyers will explain the alternative options other than the traditional court route. Such options can include private hearings, round table negotiations such as the collaborative law process and even one lawyer providing advice to both parties under the ‘one lawyer one couple’ model.
All of these methods are confidential, aid the parties in amicable and creative solutions and with all options, experts such as accountants, tax advisors and even corporate lawyers can be brought in. There are many approaches to agreeing a financial settlement, all of which are capable of being tailored to suit the couple’s and the businesses’ needs.
Top tips
Ultimately, separated SME business owners when deciding to divorce should consider at the earliest opportunity with the family lawyer:
- the value of the business
- operational impacts
- tax implications
- financial needs of the business, as well as the parties and the wider family
A fair and practical resolution for the business and the parties must be found.
