Married couples often set up in business together but what happens if the business is going well but the marriage is not? What if they want to divorce their spouse, but not their business?
If the business (be it a sole trader, partnership, or limited company) was set up during the marriage it will be “matrimonial property”. It does not matter if the business is in the name of one of the parties only or if one party owns a greater share of the business than the other. If the spouses are the only two parties involved in the business, then the whole business is “matrimonial property”.
What this means is that on divorce the “net value” (assets, less debt) of the business should be shared fairly between the parties in a marriage. “Fairly”, unless there are special circumstances applying to the business, usually means equally.
It is the “value” of the business that is to be divided between the parties, which is not the same as dividing the actual business between them. If the Court must deal with the business in divorce proceedings, then a forensic accountant’s valuation of the business will be needed. If the business owns assets, then valuations of these assets will be included in the business valuation for example a property company would need each property valued and a farming business would require all livestock, implements, machinery, crops, etc valued.
There will usually be a period between the parties separating and then resolving the financial aspects of their separation. It may or may not suit the parties to continue to run the business together in that time. The practicalities of how to deal with this interim period might be a matter of partnership law, company law or contract. If they really cannot get on, then the Court may need to intervene on an interim basis and make the decision about the involvement of the spouses in running the business.
How does the Court decide what happens to the business if parties cannot agree on what is to happen to it? The Court, on Divorce, will look at the full facts regarding the business including who owns it; who works in it; what income does it give either party; are there significant assets which could be sold; is either party’s pension dependent on the business; and what would be a fair outcome?
There are several options available to deal with the business post-Divorce including:
- One spouse retains control of the business alone and buys the other out.
- One spouse retains control of the business and its value is set off against other assets e.g. a house or a pension is retained by the other party instead.
- Both parties remain owners of the business – this can be in proportion to a fair sharing of the value of whole matrimonial property i.e. the party retaining the family home may also retain a smaller percentage of the business.
- The business or shares are sold to raise funds to divide between the parties in accordance with their share of the net value of the matrimonial property.
- The business (or shares in it) are divided up between the parties in a fairer way.
Whichever option is chosen, success is going to depend on whether the parties can, in fact, continue to work together or indeed want to continue to work together.
Dividing up a business does not have to end up in court. There may be very good business reasons for avoiding court altogether such as possible negative publicity for the business where a Divorce goes through the Courts. In Scotland parties now have the option of using bespoke family law Arbitration or Mediation to resolve the financial aspects of their separation and can agree on confidentiality in relation to the business.
The end of the marriage need not mean the end of a business.
This article originally featured in The Scotsman on 4 July 2022.
