It’s not uncommon to resist a divorce due to the uncertainty around how your business will be impacted. A business is not only your family’s livelihood, but often part of your ‘family’s dynasty’. The risk of losing your business, or severely disrupting it through a divorce, can be terrifying.
Here we give you an insight as to how your business is likely to be affected, so you can navigate your divorce with more certainty.
The main issues faced by business owners during a separation is disclosure of documents, ascertaining the business’ value, and then potentially having to transfer or sell some or all of the business.
You want to see what?!
One of the first questions you will be asked by your spouse’s lawyer is to provide a lot of commercially sensitive documents about your business. You may be wondering why? The main reason is so that your spouse, and their advisers, can work out the value of the business. They may also use this as an opportunity to better understand how the business is ‘structured’, and how it can be ‘moved’ from one party to the other, if necessary.
Depending on how your business is structured this will often mean producing copies of Financial Statements, tax returns and certain key contracts/agreements representing material value to your business. It will usually also require you to provide trust deeds, company constitutions, related-party loan agreements, joint venture documentation, etc. This can feel uncomfortable, particularly if there are confidentiality issues or other parties involved in the business operations (e.g. business partners).
If you resist producing the documents, you or your accountant (and your bank, etc.) may be faced with a subpoena. This is a document issued by the Family Court requiring disclosure of these things – with the threat of being in ‘contempt of Court’ if the person refuses.
There are far reaching obligations on a business owner to be transparent to their spouse about the business, but you can put in place measures to ensure your spouse is not using it as an exercise to become a ‘sneaky beak’, or using the information for unhelpful purposes.
We can help you understand what will have to be revealed, and what you can resist providing. For example, you are generally not required to bring documents into existence to satisfy a demand, or undertake calculations or provide opinions.
What is it worth?
We often see a spouse of the business owner inflate the value of the business. No matter how many documents are provided, or explanations are given, they will see the gross income or non-current assets and form a false impression. Your business documents will provide a snapshot of the value of the business but may not reflect matters which will affect the value.
If you and your spouse do not agree to a value of your interest in the business, you can obtain a formal valuation. It is often the case that marketability or economic climate are ignored by an inquiring spouse, and so engaging an independent valuation expert can be helpful to ensure the true value of the business is considered.
One thing that often comes up in the context of personal services business is ‘personal goodwill’. It may be the case that your business is profitable, but is basically worth nothing if you are no longer involved. Unfortunately the Family Court is unlikely to agree with you on this issue. The only way to ‘prove’ the real value of your business may be selling it to an unrelated party.
We can assist you in understanding how a business is valued for family law purposes.
Once a value has been ascribed to your business, the next question is how that value gets split between you and your spouse. Generally the person involved in the business will want to keep the business, and therefore your spouse will want to take ‘other assets’ as their share. This fact means that you are likely to want to put a low value on the business, whereas your spouse will be arguing for a high value – so they get more (or all) of the other assets.
In the end, if the value placed on the business is too high, then it may need to be sold in order to ‘fund’ the separation. This fact can often bring your spouse back down to earth as far as accepting a ‘reasonable valuation’.
Another fact that comes into play is the reality that your business is also likely to be the main source of your family’s income. This means it will be financing things like your children’s school fees as well as support payments. You need to be careful not to ‘pay twice’, i.e. once in giving a disproportionate share of the other assets to your spouse to retain the business, and then being obliged to apply a big portion of the business’ income to support the family.
Taking all of these factors into account, it may be that you need to seriously consider your spouse retaining an interest in the business, or selling the business on the open market and realising its true value.