Relationship Breakdown and the Family Business
Relationship breakdown is difficult at the best of times, but when there is a family business involved it can cause great uncertainty and raises many questions. Is the business taken into account, and if so, to what extent? How should the business be valued? Will there be a forced sale of the buisness? Is my spouse entitled to half? Will I be forced to sell my shareholdings, or transfer them, or part of them, to my spouse?
The answer to these questions depends upon the individual circumstances of each case, but in most cases the value of the family business will be taken into account along with the value of other assets such as the value of the home, savings, pension provisions etc.
If the marriage is a long one, and the value of the business high, it can be a central issue in the case, and detailed consideration of the business may well be warranted. By contrast, if one spouse has owned the business for many years, but the marriage is only short, the business may be of little significance, and in such circumstances it is likely that a spouse's claim will rest more by reference to their needs as opposed to a valuation of the busines assets.
If the buisness valuation is disputed, then ultimately it is for the judge to decide which valuation evidence he prefers. But how are businesses valued?
It is usual to instruct a forensic accountant to undertake a business valuation, such accountant being instructed by both the husband and the wife. The exact method used to value the buisness will depend upon the type of business being valued. The valuation process is something of an art, albeit backed by science. There are several methods which can be used, or combined in order to assess the business value. There are 4 main methods utilised to value a business.
Earnings based valuation - This examines the future earnings potential of the business.Very basically, a price to earnings ratio is applied to an assessment of the maintainable earnings and the accountant will look at comparable companies. The price/earnings ratio represents the price of the company divided by it's profits after tax. To obtain a valuation, the current profits are then multiplied by the ratio. There will then be discounting applied depending upon the exact structure of the business etc, and this is down to the expertise of the accountant and well beyond the remit of this article.
Dividend based valuation - Looks at the expected future dividend payments of the company. It is usually the valuation method adopted when valuing a small minority shareholding where the shareholder has no real influence.
Discounted cashflow - Used when valuing a business that is a well established cash generating buisness, and stable. It works on a cash flow forecast for a number of years plus a residual business value. The business is valued using a discount rate which enables the value of the business in todays terms to be assessed.
Asset based valuation - used when the business has a significant tangible asset base. It does not take account of future earnings, and the starting point is the asset values stated in the business accounts, which are then adjusted to take account of current market rates.
Many other issues will also be considered in the valuation process. Can one spouse draw significant sums from the business to meet a financial settlement, either immediately or over a period of time (Liquidity)? What are the tax implications of withdrawing monies from the business, and what are the most tax efficient ways of withdrawing monies?
The valuation exercise may also be of use if one spouse believes that the other is hiding assets in the Company.
Is my spouse entitled to half of my business?
The short answer is that it is unlikely that your spouse will be given a direct interest in the business. More commonly, the Court will allow you to keep the business, but will award more assets to your spouse in order to compensate them. It is very rare that a Court will force the sale of a business. Usually, such a business will be the main source of financial support, and should be preserved wherever possible.
Similarily, where one spouse owns shares in the business, it is unusual for the Court to transfer ownership of those to the other spouse. This is different if both husband and wife own shares, as it is usual for only one spouse to retain the business after the divorce, with the other being awarded assets, maintenance payments, or a combination of the two in lieu.
Although a potentially complicationg factor, the existence of a family business is not uncommon. It is essential that advice is taken from the outset when a relationship breaks down, and will often involve careful tax and accountancy planning in order to maximise any potential benefit to be derived from the business within the divorce settlement.
If you feel that Oerton Simm can help you then please do not hesitate to contact us.