Understanding what happens to business assets in a divorce
Whatever stage of the divorce process you are at, if you’re a business owner, there’s a good chance that you’re asking yourself “What happens to my business assets in a divorce?”
Call our family law experts on 0113 320 5000
In England and Wales, your business or business interest is a financial resource, which will be considered together with your other financial resources when a fair financial settlement is considered.
At one time it was fair to conclude that a business would never, or would extremely rarely, be sold in a divorce case. That was laid to rest as long ago as 2001, however, when Coleridge J stated in the case of N v N (Financial Provision: Sale of Company) [2001] 2 FLR that:
“I think it must now be taken that those old taboos against selling the goose that lays the golden egg have largely been paid to rest; some would say not before time. Nowadays the goose may well have to go to market for sale.”
Matrimonial and non-matrimonial business assets in a divorce
When working out what happens to business assets in a divorce, one of the key questions is whether the asset is matrimonial or non-matrimonial. This distinction can have a big impact on how the business is treated in a financial settlement.
Matrimonial assets are those built up during the marriage, such as a business started together or grown with shared resources. These will be considered part of the pot to be divided, and the starting point is that they should be shared equally between both parties. This is known as the sharing principle. However, an equal split isn’t guaranteed. The court may decide one person needs a greater share. If they need to provide a home for the children, for example.
In contrast, non-matrimonial assets are things that one person brought into the marriage, or which came not through the couples’ effort. So, a business that they already owned, or assets they received as a gift or inheritance. These are not automatically shared, but the court will still take them into account and they could be divided if needed to meet the other person’s needs. That’s particularly relevant where one party wouldn’t be able to meet their housing or income requirements without including some of those non-matrimonial assets. There are also complexities around whether non-matrimonial assets have become matrimonial over time, and this could particularly apply to a business held over many years.
Understanding the source and history of the business is vital, especially in complex cases involving inherited or generational businesses.
Approach to sharing business assets in a divorce
A key part of understanding what happens to business assets in a divorce is how the court approaches the process of identifying and dividing those assets. The first step is to establish what the assets are and what they are worth. This is known as computation.
To do this, both parties are required to provide full and frank financial disclosure, usually by completing a court form known as Form E. This includes detailed information about income, property, pensions, and any business interests. Supporting documents, such as company accounts, share certificates, or business valuations, must also be included. In many cases, an independent expert such as a forensic accountant is brought in to help assess the true value of the business.
Once the full financial picture has been established, the court or the parties (if reaching agreement out of court) will move on to the distribution of assets. This means deciding who should receive what. When it comes to business assets, as with all other assets of the family, the court’s focus is always on achieving a fair outcome. That doesn’t always mean a 50/50 split. It depends on each person’s needs, contributions, and the wider context of the case, including any children involved.
Business assets in a divorce
One of the most common misconceptions we hear is that businesses are excluded from financial settlements. In reality, that’s not the case. A business, whether it’s a sole trader setup, a limited company, or a family-run partnership, can play a central role in divorce negotiations. Both in terms of its value and the income it generates.
When working out what happens to business assets in a divorce, the court will consider any business interests held by either party. If a business was set up or purchased during the marriage, it’s likely to be treated as matrimonial property, which means its value may need to be shared. If the business predates the marriage, or if it’s a long-standing family business, it may be considered non-matrimonial. However, even then, the court may take all or part of its value into account, particularly if it has grown during the relationship or contributed to the family’s finances.
In more complex situations, where a business has elements that were built both before and during the marriage, expert input is often needed. A forensic accountant may be instructed to assess which parts of the business are matrimonial and which are not.
Message a family law expert at @email
Many businesses also involve extended family and sometimes multiple generations, which can make it even more complicated. Even if a spouse hasn’t worked in the business, they may still hold shares or have a claim against its value. Particularly if they were a director, shareholder or employee for tax reasons.
At Winston Solicitors, we understand that dividing business assets in a divorce can be one of the most sensitive and difficult parts of reaching a financial settlement. We work closely with our clients to ensure that your business is properly valued, understood, and protected wherever right to do so. All while still achieving a fair outcome for everyone involved.
So, what do you need to think about if you have a business and are divorcing?
Valuation of business assets
One of the most important steps in understanding what happens to business assets in a divorce is getting a clear and accurate valuation of the business. If you own or have an interest in a business, you’ll be expected to provide full details as part of the financial disclosure process. This usually means sharing company accounts, up-to-date financial records, and any relevant documents that show what your share of the business is worth. For example, a recent offer from a third party to buy the business.
If both parties can’t agree on the business’s value, the court may order a formal valuation. This is usually carried out by a forensic accountant who acts as an independent expert. Their job is to provide a report that sets out the market value of the business and any income it produces. They also assess how easily money can be taken from the business (also known as liquidity) without disrupting its operations.
The valuation isn’t just about putting a number on the business. It also helps the court, or the couple negotiating a settlement, understand whether part of the business can or should be shared. As well as whether any cash can be extracted without causing harm to the business itself.
A lot depends on the type of business and how it’s structured.
If, for example:
- The business is based on property ownership, the value of the properties, any mortgages or loans, and rental income will all be key considerations.
- Your business has limited physical assets, it might be valued based on its income potential, using an income multiplier.
- One spouse owns a minority share, a discount might apply, because that interest may be harder to sell or carry less control.
Other important factors include:
- Whether any part of the business is matrimonial and therefore shareable
- How much money could be taken out of the business without causing harm
- Whether a sale of assets or shares could be avoided altogether
- If there are alternative assets that can be offered in place of business interests
- The potential tax consequences of transferring or extracting value from the business
In short, valuing a business during divorce is a detailed process, but a vital one. Having the right expert on board ensures that the court or negotiating parties have the information they need to reach a fair and workable financial settlement.
Types of Businesses
Sole Traders
A sole trader owns, operates and controls the business as an individual and for their own benefit. Whilst they may have employees who work for them, there is only one owner. Sole traders are personally responsible for the debts of the business and will pay tax on their earnings.
Partnerships
A Partnership involves two or more individuals who share the ownership and responsibility of the business. Consequently, they share both the profits and losses of the business and have joint responsibility for running it.
Partnerships may be ‘unincorporated.’ Meaning that the partners are personally responsible for any losses, debts etc. Or ‘incorporated.’ For Example, a Limited Liability Partnership, which means that the partners’ liability is limited.
Limited Company
A limited company is operated by the directors on behalf of the shareholders and is a separate and distinct legal entity. The limited company has its own rights and obligations. Limited companies pay corporation tax on the profits of the business.
Other Considerations When It Comes to Business Assets in a Divorce
Tax
Taxation issues can arise on the transfer or sale of business assets.
There may be certain reliefs which can mitigate the tax. Getting specialist tax advice is fundamental ahead of an agreement being reached regarding the distribution.
Discount
In some cases, the value of a person’s share in a business may be reduced or discounted, if they own a minority shareholding. This is because a smaller share in a company often comes with less control and may be harder to sell, which can affect its market value.
Understanding when a discount should apply (and how large the discount should be) can make a big difference to the overall financial settlement. That’s why it’s essential to get expert advice from a solicitor with experience in business valuations on business assets in a divorce.
Speak to a family lawyer in Leeds today
Transfer of Shares
The transfer of shares from one spouse to another may seem like a sensible solution and may form part of a financial settlement.
However, there are a number of requirements which must be complied with (legal & regulatory) if one party is transferring their shares to another. It is important that expert legal advice is obtained.
The impact of pre or post nuptial agreements in cases involving business assets
Consideration of any pre and post nuptial agreement is vital for anyone contemplating marriage or civil partnership. These agreements can be key to protecting, for example, a long-standing generational family business. They can ensure both parties have considered the impact upon the business of any later separation and ensure the smooth running of the business during any divorce.
This is especially important when third parties also have their own interests in the business. Prenuptial agreements are a key element of business and wider family planning. They are also much easier to negotiate when relationships are thriving as opposed to when they have broken down.
Prenups offer key evidence of the value of any business interests at the outset of the relationship, avoiding potentially expensive forensic accountancy exercises later.
The benefit of non-court dispute resolution where there are business assets in a divorce
Wherever possible, non-court dispute resolution (NCDR) should be considered to avoid the costs and stress of lengthy court proceedings. This can be crucially important in cases involving active businesses, where the delay and uncertainty of waiting for a court decision can damage the on-going financial stability of the business. This can be especially true where there are third parties involved, or competitors might seek to take advantage of any potential disruption.
Private dispute resolution and arbitration offer a faster, more confidential way to reach a financial settlement. These options are especially popular with people who have business assets, as they help avoid the delays, costs, and public exposure of court proceedings. Many of our clients choose these routes so they can resolve matters more discreetly and with less stress.
The importance of planning for a settlement
Even when both parties are able to reach a financial agreement, it is still important to get expert advice from solicitors and accountants. This helps to ensure that any tax issues are properly handled and that nothing is overlooked.
If one person is leaving the business, considerations like employment status and settlement or compromise agreements need to be carefully managed. And if both parties will remain involved in the business, putting a clear shareholder agreement in place is essential to avoid future disputes. The key is not to rush. A well-thought-out settlement will help you to plan ahead and reduce the risk of legal problems after the divorce is finalised.
Speak to a family law expert about what could happen to your business assets in a divorce
Divorce can be a complex process, especially for business owners. There are a number of factors which need careful consideration when it comes to business assets in a divorce.
It is important to seek professional advice in order to navigate the process, protect your interests and preserve the viability of the business.
