When couples are in business together and they divorce, the first thing they usually think about is what will happen to the business, who will keep it, and what will happen to their role within the business. There are various options in this situation:
To stay in business together
The couple may decide to stay in business together, this tends to happen where both spouses have significant roles within the business so it is important for both to remain as the business could not run properly without either spouse. This may also happen where the couple had planned to build the business up in order to sell it on in the future.
In both cases it is vital that the spouses and other shareholders (if any) enter into an in-depth Shareholders’ Agreement or a new Shareholders’ Agreement if they already have one in place. This will set out the views of the shareholders for future plans and will ensure that any disputes which may arise are dealt with fairly.
To sell shares in the business
Alternatively, the couple may decide that one is to sell their shares to the other and cut ties from the business completely. Quite often one spouse is the driving force of the business, they may also own more shares and the other may play a smaller role for example an administrative role i.e. company secretary. In this case the spouse with the minor role in the business may wish to sell their shares and the spouse with the larger role may wish to buy-out their spouse in order to have a clean break.
Where the couple cannot come to an agreement, a judge has the power to order that one spouse must transfer their shares to the other spouse if they are the only shareholders in the business. A judge may also order that the business is sold and neither party are to remain involved in the business. However, more often than not divorce cases settle before reaching a judge in court and so it is important that adequate legal advice is taken to ensure that a fair agreement is reached between the parties.
If shares are to be sold, an accountant will have to value the company and the shareholdings as part of the divorce proceedings. The couple may agree to a joint expert valuation or they may have separate valuations which may be contradictory and so the case may progress to court if an agreement cannot be reached. The valuation will depend on a number of factors including:
the assets of the business including property, company cars etc;
the income the business generates;
whether it is possible to extract capital from the business;
the borrowing capacity against the business and/or business assets; and
the shareholding structure of the business.
Therefore, if the couple can agree a value of the business the process will be quicker and less complicated. However, it is vital to obtain expert advice to ensure the valuation figure is accurate and shows a true value of each spouse’s shareholding.
If you jointly own a business with your spouse and have taken the decision to separate or divorce, Farleys’ family law team can advise you on your next steps. Contact our experienced team today on 0845 287 0939 or by email.
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